Personal Finance and Economic Decision-Making — High School Economics practice questions

The FICA deduction on a paycheck pays for:

1. federal income tax
2. health insurance premiums
3. Social Security and Medicare
4. state sales tax

Answer: C — Social Security and Medicare

C) Correct — Employees and employers each pay a share. A) Is withheld separately. B) Are separate deductions. D) Is paid when you buy goods.

Experts generally recommend an emergency fund that covers:

1. 3 to 6 months of expenses
2. 1 week of expenses
3. 5 years of expenses
4. one month of wants

Answer: A — 3 to 6 months of expenses

A) Correct — It protects against job loss or surprise bills. B) Too small for most emergencies. C) Far more than typically advised. D) Should cover essential expenses.

An index fund helps reduce risk because it:

1. guarantees a profit
2. invests in a single company
3. is insured by the FDIC
4. holds many companies at once

Answer: D — holds many companies at once

D) Correct — It is a low-cost way to diversify. A) No investment is guaranteed. B) Would increase risk. C) Investments are not FDIC-insured.

The APR on a loan tells you:

1. the loan's total amount
2. your monthly payment
3. your credit score
4. the yearly cost of borrowing

Answer: D — the yearly cost of borrowing

D) Correct — It includes interest and some fees. A) Is the principal. B) Depends on APR, principal, and term. C) Is a separate number.

With a subsidized federal student loan:

1. interest builds up while you are still in school
2. you never have to repay it
3. the government covers interest during school
4. the interest rate is 25%

Answer: C — the government covers interest during school

C) Correct — Unsubsidized loans build interest during school. A) Describes unsubsidized loans. B) Describes a grant. D) Federal loan rates are far lower.

Paying only the minimum on a credit card balance usually means:

1. the balance is paid off quickly
2. no interest is charged
3. your credit limit is raised
4. paying much more in interest over time

Answer: D — paying much more in interest over time

D) Correct — High rates compound on the remaining balance. A) It can take years. B) Interest is charged on the unpaid balance. C) Is not a result of minimum payments.

Starting to save for retirement at 22 instead of 32 matters mainly because:

1. interest rates are higher for young people
2. compound interest has more time to grow
3. taxes are lower at 22
4. the money is insured longer

Answer: B — compound interest has more time to grow

B) Correct — Earnings build on earlier earnings. A) Rates do not depend on age. C) Is not the main reason. D) Insurance is not the reason.

Gross income is ___, while net income is ___.

1. take-home pay; pay before deductions
2. pay before deductions; take-home pay
3. yearly pay; monthly pay
4. wages; interest income

Answer: B — pay before deductions; take-home pay

B) Correct — Taxes and other deductions separate the two. A) Reverses the two. C) Both can be yearly or monthly. D) Both include all income.

Why is paying off credit card debt a high priority?

Average credit card interest rates (~20%+ APR) compound rapidly and exceed nearly all investment returns.

Worked example: You deposit $2,500 at an annual interest rate of 6%, compounded once per year. How much will you have after 10 years with no additional deposits or withdrawals?

Step 1 — Compound interest formula: A = P × (1 + r)^t, where P = principal, r = annual rate (decimal), t = years. Step 2 — Substitute: P = 2,500; r = 0.06; t = 10. So A = 2,500 × (1.06)^10. Step 3 — Compute (1.06)^10. Use exponent shortcut or rule-of-72 estimate: at 6%, money doubles roughly every 12 years, so 10 years is a bit less than doubling. Precise: (1.06)^10 ≈ 1.7908. Step 4 — A ≈ 2,500 × 1.7908 ≈ $4,477. Step 5 — Interest earned = A − P ≈ $4,477 − $2,500 = $1,977. Lesson: thanks to compounding, ~$2,500 nearly doubles in a decade at a modest 6% rate.

What is insurance?

A contract that transfers risk to an insurer in exchange for a premium — pays out for covered losses.

What is a budget?

A plan for income and expenses over a period — helps track spending, save, and meet financial goals.