Foundations of Personal Finance is designed to help you succeed. Each of
the following features will assist you in mastering the concepts presented
in the textbook.
Welcome to Welcome to
Foundations of Foundations of
Personal Finance Personal Finance
Reading for Meaning
provides tips to improve
reading comprehension and
understanding. Review the tip
before you read each chapter.
Real Life
Connections
features apply
chapter con-
cepts to real-life
situations.
Linking to…
features connect
key topics to the
academic areas
of history, math,
or science.
Central Ideas present the
main concepts discussed in
the chapter.
Chapter Objectives outline
skills you will build while
studying the chapter.
Key Terms appear in bold,
highlighted type in the text
where they are defi ned.
4
36
2
Government and the
Economy
business cycle
recession
depression
infl ation
stagfl ation
labor force
unemployment rate
underemployment
fi scal policy
gross domestic
product (GDP)
consumer price
index (CPI)
labor union
monetary policy
Federal Reserve
System
tax
defi cit spending
national debt
perfect competition
monopoly
oligopoly
collusion
After studying this chapter,
you will be able to
•
diagram and explain the four parts of the
business cycle.
•
compare and contrast recession, infl ation, and
stagfl ation.
•
describe how the government uses fi scal and
monetary policy to combat infl ation and recession.
•
explain the economic consequences of
government taxingand spending.
•
explain how the national debt hurts the economy.
•
describe the government’s role in
promoting competition.
•
identify the laws and government
agencies that protect consumer interests.
Reading for
Meaning
The summary at the end of the chapter
highlights the most important concepts.
Read the summary fi rst. Then make
sure you understand those concepts as
you read the chapter.
37
Central Ideascitizens.itsfor
• The goal of government economic policies is to create economic stability
and prosperity
• Government enacts laws and regulations to ensure fair competition and
to protect the public well-being and safety.
• Government agencies at all levels of government assist and protect
consumers by providing information, protection, and services.
Central Ideas
20
6 Unit 2
Managing Your Finances
A
revolving credit account
offers you a
choice of
paying
in full
each
month
or
spreading
payments
over a
period of
time. If you
choose
not to
pay in
full,
there is a fi
nance
charge.
You
must make
at least
the
minimum
payment
each
month. For
small
balances,
the
minimum
payment is
usually a set
amount,
such as
$10. For
larger
amounts
of
credit, the
minimum
payment
is usually
a
percentage of
the
unpaid
balance.
A
typical
revolving
credit
account
places a
limit on the
total
amount
you
may owe at
any one
time.
You may
make any
number
of
purchases at
any
time as
long as
you do
not exceed
your
credit limit.
This
type of credit
is
available
through many
retailers and
through
issuers of
credit
cards,
such
as Visa,
MasterCard, and
Discover.
They can
be used
to buy
goods
and
services
from
any seller
who
honors the card
you
carry.
Establishing Credit
You may fi
nd it
diffi cult
to get
credit at fi rst.
This
is because
creditors
want
evidence that
you can
and will
pay your
debts.
Here
are some
steps
you can
take to
build a
sound fi
nancial
reputation.
1.
Start with a
job. Prove
that you
can earn
money.
2.
Open
a savings
account.
Saving
regularly
shows a
responsible
attitude
toward
fi
nancial
matters. Your
savings
also may
serve as
collateral for
a loan.
3. Open a
checking account. A
well-managed
checking
account
shows
you
have
experience
in
handling
money.
4.
Apply to a
local department
store
or a
gasoline
company for a
credit card.
If you
are granted
credit,
make
small
purchases and
pay
promptly.
This
will give
you a
record of
steady
payments.
R
EAL LIFE
C
O
N
N
E
CTI
O
N
S
As of 2009,
it was estimated
that one in
fi ve 18-
to-24-year-olds
are
living in “debt hardship”
and the numbers are growing.
The
average
college
graduate
leaves
school with
$19,000 in
student loa
n debt. Some
students
have
as much as
$40,000. Those in
professional
schools such as
law,
medicine, and
dentistry may incur debts as high as $100,000
by
graduation. Credit card debt may add
another $3,000 to $7,0
00 to these obligations.
The fact is more students drop out of college
today for fi
nancial concerns than for academic
failure. Students should try to
explore
every
possible
way to pa
y for their education without
incurring
excessive debt. Th
ey should consider
savings, scholarships, low-tuition
schools, work/
study prog
rams, part-time jobs,
government
aid programs, and other means of paying for
education and
training.
Debt
Problems
Among
Students
298 Unit 2 Managing Your Finances
Dollar-cost averaging offers the added advantage of convenience. You
can set up an automatic payment and make it a part of your overall budget.
It helps you make a habit of investing amounts of money you can afford.
You can invest as little as $25 monthly. Brokerage fi rms, mutual funds, and
retirement accounts all offer opportunities for dollar-cost averaging.
Buying Securities
Once you have decided on a few specifi c securities you wish to buy,
there are several ways to acquire them.
Brokerage Firms
To buy stocks, bonds, and other securities, you may open an account
with a brokerage or securities fi rm. The main mission of a brokerage fi rm
is to buy and sell for its customers. The fee you pay for these services is
called a commission.
You make an application to open an account with a fi rm. Once your
application is accepted, you call your broker with your orders to buy and
sell. Most fi rms also offer online services.
Full-service brokerage fi rms maintain research departments to fol-
low market trends and individual securities. In addition, they provide
investment advice, portfolio management, and other services. The com-
mission you pay covers the cost of trading and support services provided
Linking
to...Math
How Dollar-Cost Averaging Works
The following example illustrates dollar cost
averaging. Investor A buys $1,000 worth of Stock X.
At $25 a share, the chart shows that Investor A
bought 40 shares. Using dollar-cost averaging,
Investor B buys $250 worth of Stock X every month.
The stock’s price drops over the next three
months. By the fourth month, the 40 shares
of Stock X purchased by Investor A would sell
for $800—a loss of $200. However, after four
months, Investor B owns 51.7 shares of stock.
Investor B’s shares would sell for $1,034—a gain
of $34.
Month Price/
Share
Investor A Investor B
Investment # Shares Investment # Shares
1 $25 $1,000 40 $250 10
2 $20 $250 12.5
3 $15 $250 16.7
4 $20 $250 12.5
Total $1,000 40 $1,000 51.7
Brokerage Clerks
Brokerage clerks
compute and record data
pertaining to securities
transactions. They may
also take customer
calls, create order
tickets, record a client’s
purchases and sales, and
inform clients of changes
to their accounts.