Consumer Economics and Personal Finance
Consumer Economics and Personal Finance tests decisions about spending, saving, credit, risk, and consumer rights. Expect calculation items and scenario items that ask which choice is financially responsible.
Core rules
- A budget compares net income with fixed and variable expenses; an emergency fund commonly targets three to six months of essential expenses.
- Opportunity cost is the value of the next-best alternative, not every alternative.
- Compound interest uses A = P(1 + r/n)^(nt). The Rule of 72 estimates doubling time as 72 divided by the annual percentage rate.
- Credit cost depends on APR, fees, and repayment period. FICO scoring weights payment history about 35%, amounts owed about 30%, length of credit history 15%, new credit 10%, and credit mix 10%.
- Comparison shopping uses unit price, warranty terms, return policy, and total cost of ownership.
Worked example
A saver deposits $2,000 at 5% compounded annually for three years. A = 2000(1.05)^3 = 2000(1.157625) = $2,315.25. Interest earned is $315.25. If the same $2,000 earned simple interest, it would earn $100 per year, or $300 total. The extra $15.25 is interest on previously earned interest. Reasoning shown this way prevents confusing the nominal rate with the effective yield.
Traps
APR and APY are not interchangeable; APY reflects compounding. A low minimum payment stretches repayment and increases total interest. A debit card draws on existing funds, while a credit card creates a loan. Sunk costs are unrecoverable and should not drive a new decision. Zero-percent financing can still carry fees or lost cash discounts.
Consumer protection
Know cooling-off periods, implied and express warranties, credit-report dispute rights, and the value of reading contracts before signing.