Module 2

What is the primary role of a bank in the economy?

• • A) To control stock prices

• • B) To transfer money from savers to borrowers

• • C) To provide only savings accounts

• • D) To monitor the real estate market

Answer explanation

The primary role of a bank is to transfer money from savers to borrowers, facilitating investment and consumption in the economy. This function supports economic growth, making option B the correct choice.

Considering both current and future tax brackets, which scenario best describes a situation where a Roth IRA might be more advantageous than a Traditional IRA?

• • A) An individual currently in a high tax bracket who expects to be in a higher tax bracket in retirement.

• • B) An individual currently in a low tax bracket who expects to be in a higher tax bracket in retirement.

• • C) An individual in a high tax bracket now, expecting to be in a lower tax bracket in retirement, and who wants immediate tax deductions.

• • D) An individual who does not expect any significant change in tax brackets between now and retirement.

Answer explanation

B is correct because a Roth IRA is beneficial for someone in a low tax bracket now who expects to be in a higher bracket in retirement, allowing tax-free withdrawals when they are in a higher tax bracket.

Which of the following statements accurately reflects the process and regulatory requirements for opening and maintaining an offshore account as a U.S. taxpayer?

• • A) U.S. taxpayers are free to open offshore accounts without reporting, provided they use them solely for international investments.

• • B) Offshore accounts must be reported annually to the IRS through FBAR and FATCA filings, and not doing so can result in penalties.

• • C) Offshore accounts offer complete tax exemption, regardless of income source, if held in a tax-friendly country.

• • D) Offshore accounts require the account holder to maintain a primary residence in the country where the account is held.

Answer explanation

B is correct because U.S. taxpayers must report offshore accounts annually via FBAR and FATCA. Failure to report can lead to significant penalties, making it essential to comply with these regulations.

Which of the following is a unique advantage of a Health Savings Account (HSA) that differentiates it from most other tax-advantaged accounts?

• • A) Contributions are tax-deductible, but withdrawals are taxed as regular income.

• • B) Funds roll over each year, and after age 65, they can be used for non-medical expenses with tax implications.

• • C) They must be used within the calendar year or forfeited.

• • D) HSAs are available to all individuals regardless of their health plan type.

Answer explanation

Choice B is correct because HSAs allow funds to roll over each year, and after age 65, they can be used for non-medical expenses, unlike many other accounts that have stricter usage rules.

For which of the following individuals would a Roth 401(k) be potentially more beneficial than a Traditional 401(k)?

• • A) An individual looking for an immediate reduction in taxable income.

• • B) An individual in a high tax bracket now, expecting a lower tax bracket in retirement.

• • C) An individual who anticipates a higher tax rate in retirement and prefers to lock in their current tax rate.

• • D) An individual who expects to withdraw funds early, before retirement age, without any penalties.

Answer explanation

C is correct because a Roth 401(k) is beneficial for those expecting a higher tax rate in retirement, allowing them to pay taxes now at a lower rate and withdraw funds tax-free later.

Which of the following is a unique benefit of the 529 College Savings Plan that may not apply to other types of investment accounts?

• • A) Contributions are tax-deductible on a federal level.

• • B) Withdrawals are tax-free for qualified educational expenses, and some states may offer additional tax deductions on contributions.

• • C) Earnings grow tax-free only if they remain in the account indefinitely.

• • D) Contributions are unlimited and do not have to be used for educational expenses.

Answer explanation

The unique benefit of a 529 College Savings Plan is that withdrawals for qualified educational expenses are tax-free, and some states offer additional tax deductions on contributions, making option B the correct choice.

Which type of bank is responsible for regulating monetary policy in the U.S.?

• • A) Commercial bank

• • B) Investment bank

• • C) Central bank

• • D) Credit union

Answer explanation

The Central Bank, specifically the Federal Reserve, is responsible for regulating monetary policy in the U.S. It manages the money supply and interest rates, unlike commercial banks, investment banks, or credit unions.

What was one of the main causes of the 2008 Financial Crisis?

• • A) An increase in savings rates

• • B) High levels of risky mortgage lending

• • C) A decrease in government regulation

• • D) The rise of digital banking

Answer explanation

One of the main causes of the 2008 Financial Crisis was B) High levels of risky mortgage lending. Lenders issued many subprime mortgages, leading to widespread defaults and a collapse in housing prices.

What distinguishes a central bank, such as the Federal Reserve, from commercial banks in its role in the economy?

• • A) The central bank is responsible for providing direct loans to businesses, while commercial banks regulate the national interest rate.

• • B) A central bank sets monetary policy, regulates the money supply, and serves as a lender of last resort, whereas commercial banks provide deposit and loan services to individuals and businesses.

• • C) Commercial banks control inflation through interest rate adjustments, while central banks manage only foreign currency reserves.

• • D) The central bank solely offers savings products, while commercial banks focus on high-risk lending practices.

Answer explanation

Choice B is correct because a central bank, like the Federal Reserve, sets monetary policy and regulates the money supply, while commercial banks focus on providing deposit and loan services to individuals and businesses.

Regarding the tax systems, which of the following statements best describes the regressive impact of indirect taxes on different income groups?

• • A) Indirect taxes, like VAT, apply only to luxury goods, so they do not impact low-income groups.

• • B) Indirect taxes impact lower-income individuals more because they consume a higher proportion of their income on taxed goods, making the tax a larger percentage of their overall income.

• • C) Indirect taxes apply only to high-income groups who purchase more goods and services.

• • D) Indirect taxes affect everyone equally, as they are applied uniformly across all income levels without impact on consumption behavior.

Answer explanation

B is correct because indirect taxes disproportionately affect lower-income individuals, who spend a larger share of their income on taxed goods, making the tax burden heavier relative to their overall income.