Fourth of July Quiz

Just over two-thirds of Americans were able to answer the  questions below correctly.  Given their “simplicity,” Annamaria Lusardi and Olivia Mitchell called the results “discouragingly low” in their 2011 research published by the National Bureau of Economic research.

Women did worse than men:  59 percent of women got it right, compared with 71 percent of men.

Take the test to see how you do.

1. Suppose you had \$100 in a savings account and the interest rate was 2 percent per year.  After five years, how much do you think you would have in the account if you left the money to grow?
a. More than \$102
b. Exactly \$102
c. Less than \$102
d. Do not know

2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year.  After one year, how much would you be able to buy with the money in this account?
a. More than today
b. Exactly the same
c. Less than today
d. Do not know

Question 1:  a.
Two percent of \$100 equals \$2, so you would have \$102 at the end of the first year.  But if you left the savings account alone to accumulate over five years, earning 2 percent per year, the account would grow to \$110.41.

Question 2:  c.
Inflation is reducing the value of your money by 2 percent per year.  If your savings account is earning less than inflation – 1 percent less in this case – the value of your money, and what you can buy with it, is declining.

Did you get them both right? Relax and enjoy the Fourth of July!

4 Responses to Fourth of July Quiz

1. Better enjoy a Happy July 4th than to worry about the math level of the population that seems disastrous to some questions that simple. God bless the USA.

2. Citizen Jones says:

I weep for our future.

3. M says:

Scary…very scary

4. My brother (who excels at math tests) complained that I excluded one of Lusardi’s questions. So here is Question 3:

Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”

a. True
b. False
c. Do not know

Answer: b. A stock mutual fund that invests in dozens or hundreds of companies is more diversified, which makes it less risky than putting all of your eggs in one basket — or one company stock.