Econ Basic
What is a fee charged by a bank when you spend more money than you have in your account?
An Overdraft Fee.
What is the difference between an Overdraft Fee and an NSF Fee?
An overdraft fee is charged when the bank covers the transaction. An NSF fee is charged when the bank refuses to cover the transaction.
What cognitive bias might cause an investor to only read good news about a stock they own and ignore warning signs?
Confirmation Bias.
Why might a "free" checking account not actually be free?
It may have hidden fees or requirements to avoid monthly fees (like a required direct deposit or minimum balance) that, if not met, make it cost money.
How does the concept of Loss Aversion explain why someone might refuse to sell a stock that is losing value?
The psychological pain of realizing the loss (by selling) feels worse than the hope that it might recover, even if holding on leads to a greater loss.
What is the term for a person who does not have a checking or savings account?
Unbanked.
If a check-cashing service charges a 4% fee, how much would it cost to cash a $500 paycheck?
$20. ($500 x 0.04 = $20)
What is the main financial service a payday loan provides that a traditional bank might not offer to someone with poor credit?
Access to very quick, short-term credit (or cash loans).
If someone is trying to avoid all banking fees, what is one strategy they could use to avoid out-of-network ATM fees?
Only use ATMs that are in their bank's network or get cash back for free at a grocery store register.
What is the term for the system where farmers promised a portion of their future harvest as collateral for supplies, often leading to debt?
The crop-lien system. (Note: This connects the economic concept of debt cycles to historical practice).
A payday loan is a short-term loan with an extremely high what?
APR or Annual Percentage Rate (Interest Rate).
What is the term for a person who has a bank account but still uses services like payday lenders or check-cashing stores?
Underbanked.
Besides a fee from the check-cashing service, what is another potential cost of cashing a paycheck instead of depositing it?
The time and transportation cost to get to the check-cashing location.
How can a bank's overdraft protection service sometimes lead to more financial harm than good for a customer?
While it prevents a transaction from being declined, it results in a high fee ($35 or more) for each transaction, which can quickly multiply and overdraw an account even further.
If your bank charges a $12 monthly maintenance fee unless you have a $500 minimum balance, what is this requirement called?
A minimum balance requirement (or condition).
What is the name of the bias where the pain of losing feels worse than the pleasure of winning?
Loss Aversion.
Which cognitive bias describes continuing to invest in something because of the money you've already spent on it, even when it's a bad idea?
Sunk Cost Fallacy.
What is the name for a paper document, like a check, that you can buy to pay bills if you don't have a bank account?
A money order.
Why is a payday loan with a $15 fee for every $100 borrowed for two weeks considered to have an APR of nearly 400%?
Calculation: The two-week fee is 15%. There are about 26 two-week periods in a year (52 weeks / 2). 15% x 26 = 390% APR.
What is the primary reason someone might choose to be unbanked despite the high costs of alternative services?
Distrust of banks, inability to meet minimum balance requirements, or to avoid the risk of overdraft fees.
True or False: A transaction fee is usually charged when you use an ATM from your own bank.
False. It's charged when you use an out-of-network ATM.
What is a common, costly result of the "cycle of debt" created by payday loans?
The borrower has to take out a new loan to repay the old one, going deeper into debt.
Besides high fees, what is a major non-financial risk of being unbanked and operating primarily with cash?
The risk of theft or loss (e.g., cash can be stolen or destroyed in a fire with no way to recover it).
How does the cognitive bias of Present Bias negatively impact long-term savings?
It causes people to overvalue immediate rewards (like buying something now) and undervalue long-term goals (like saving for retirement).
A car salesman starts negotiations at a very high price to make the final price seem like a good deal. What cognitive bias is this?
Anchoring.