CFP Course 1: Introduction to
Financial Planning Revision Questions
And Answers 2025/2026
Law of supply - Answer When market price increases, supply increases (incentive to supply
more is higher because firms can make more $)
Movement along the curve
Shift in the curve: Changes in supply outside of price (more secular changes - new tech, etc)
Law of demand - Answer When market price increases, demand decreases
Shift in the curve: Changes in demand outside of price (demand can shift to another related
good if something affects the original good (E. Coli in beef -- shift to chicken))
Equilibrium price - Answer Point where supply curve intersects demand curve (quantity
demanded = quantity supplied at current price)
Price elasticity of demand (PED) - Answer How sensitive consumers are to change in price
(luxury good vs. crude oil) - availability of substitutes, relevance to budget, and time determine
this
Equilibrium output - Answer Aggregate output or income (Y) or Gross Domestic Product (GDP)
Sum of total consumption, corporate capital investments, net exports, and government
spending
Fiscal policy - Answer Congress (federal government) has the power to influence total
consumer demand
,CFP Course 1: Introduction to
Financial Planning Revision Questions
And Answers 2025/2026
Goals: high employment, sustainable growth, stable prices
Expansionary or contractionary
Taxation - Answer As taxes decrease, consumption increases
Government spends no less than before tax cut
Delayed effect on GDP because people take time to make decisions about an increase or
decrease in income
Balanced budget - Answer Increase in government spending is MATCHED by an increase in
taxes otherwise, deficit -> US Treasury issues bonds -> banks monetize the debt by crediting the
Treasury and increasing the money supply
If government spending = taxation amount, this would be 1
Economic conditions automatically influence some aspects of government spending - Answer If
recession, people have less income to be taxed on, so government takes that into account
Successor failure of fiscal policies can only be judged based on Full-Employment Budget
conditions because it controls for economic influences
,CFP Course 1: Introduction to
Financial Planning Revision Questions
And Answers 2025/2026
Monetary policy - Answer Controls the supply of money, and influences bank lending and
interest rates
Money supply - Answer Transaction money (M1): all currency held outside of bank vaults and
can be used directly for transactions (most of this is made up of transaction money - funds held
in demand deposits (checking accounts, etc.)
Broad money (M2): M1 + savings, money market accounts (assets that can be quickly converted
to M1 for use in transactions)
The Federal Reserve Bank (the Fed) - Answer Central bank (banker's bank)
Clear inter-bank payments, audit bank records, regulate the banking system, and assist banks in
difficult financial situations
Issue Treasury savings bonds and release funds to pay government bills
Manage exchange rates and nation's foreign exchange reserves
Required reserve ratio - Answer The amount of total deposits the Fed requires its members to
keep with them at the end of the business day (affects the amount banks can loan to people)
Discount rate - Answer The interest rate banks pay the Fed
As rates increase, borrowing decreases because it's more expensive
, CFP Course 1: Introduction to
Financial Planning Revision Questions
And Answers 2025/2026
Federal funds rate: the rate banks charge other banks on overnight loans (Fed sets a targeted
range but does not directly influence it)
Prime rate: rate that banks extend to their most favored customers
Open market operations - Answer Fed's buying and selling of government securities in the
open market (used to expand or contract money supply)
Tight monetary policy - Answer Fed decreases the money supply to restrain the economy and
slow down inflation
Easy monetary policy - Answer Fed increases the money supply to stimulate the economy
Inflation - Answer General rise in the prices of goods and services
Consumer Price Index (CPI) is used to gauge inflation
Your investments must earn a higher return than your tax and inflation rates
Deflation - Answer Decrease in overall price level
Disinflation - Answer Rate of inflation still going up, but slower
Financial Planning Revision Questions
And Answers 2025/2026
Law of supply - Answer When market price increases, supply increases (incentive to supply
more is higher because firms can make more $)
Movement along the curve
Shift in the curve: Changes in supply outside of price (more secular changes - new tech, etc)
Law of demand - Answer When market price increases, demand decreases
Shift in the curve: Changes in demand outside of price (demand can shift to another related
good if something affects the original good (E. Coli in beef -- shift to chicken))
Equilibrium price - Answer Point where supply curve intersects demand curve (quantity
demanded = quantity supplied at current price)
Price elasticity of demand (PED) - Answer How sensitive consumers are to change in price
(luxury good vs. crude oil) - availability of substitutes, relevance to budget, and time determine
this
Equilibrium output - Answer Aggregate output or income (Y) or Gross Domestic Product (GDP)
Sum of total consumption, corporate capital investments, net exports, and government
spending
Fiscal policy - Answer Congress (federal government) has the power to influence total
consumer demand
,CFP Course 1: Introduction to
Financial Planning Revision Questions
And Answers 2025/2026
Goals: high employment, sustainable growth, stable prices
Expansionary or contractionary
Taxation - Answer As taxes decrease, consumption increases
Government spends no less than before tax cut
Delayed effect on GDP because people take time to make decisions about an increase or
decrease in income
Balanced budget - Answer Increase in government spending is MATCHED by an increase in
taxes otherwise, deficit -> US Treasury issues bonds -> banks monetize the debt by crediting the
Treasury and increasing the money supply
If government spending = taxation amount, this would be 1
Economic conditions automatically influence some aspects of government spending - Answer If
recession, people have less income to be taxed on, so government takes that into account
Successor failure of fiscal policies can only be judged based on Full-Employment Budget
conditions because it controls for economic influences
,CFP Course 1: Introduction to
Financial Planning Revision Questions
And Answers 2025/2026
Monetary policy - Answer Controls the supply of money, and influences bank lending and
interest rates
Money supply - Answer Transaction money (M1): all currency held outside of bank vaults and
can be used directly for transactions (most of this is made up of transaction money - funds held
in demand deposits (checking accounts, etc.)
Broad money (M2): M1 + savings, money market accounts (assets that can be quickly converted
to M1 for use in transactions)
The Federal Reserve Bank (the Fed) - Answer Central bank (banker's bank)
Clear inter-bank payments, audit bank records, regulate the banking system, and assist banks in
difficult financial situations
Issue Treasury savings bonds and release funds to pay government bills
Manage exchange rates and nation's foreign exchange reserves
Required reserve ratio - Answer The amount of total deposits the Fed requires its members to
keep with them at the end of the business day (affects the amount banks can loan to people)
Discount rate - Answer The interest rate banks pay the Fed
As rates increase, borrowing decreases because it's more expensive
, CFP Course 1: Introduction to
Financial Planning Revision Questions
And Answers 2025/2026
Federal funds rate: the rate banks charge other banks on overnight loans (Fed sets a targeted
range but does not directly influence it)
Prime rate: rate that banks extend to their most favored customers
Open market operations - Answer Fed's buying and selling of government securities in the
open market (used to expand or contract money supply)
Tight monetary policy - Answer Fed decreases the money supply to restrain the economy and
slow down inflation
Easy monetary policy - Answer Fed increases the money supply to stimulate the economy
Inflation - Answer General rise in the prices of goods and services
Consumer Price Index (CPI) is used to gauge inflation
Your investments must earn a higher return than your tax and inflation rates
Deflation - Answer Decrease in overall price level
Disinflation - Answer Rate of inflation still going up, but slower
