PART I

TEST OF FINANCIAL

KNOWLEDGE:

EXAMINER’S MANUAL

William B. Walstad

Ken Rebeck

Prepared for the Council for Economic Education

(April 4, 2016)

ABOUT THE AUTHORS

William B. Walstad is Professor of Economics at the University of Nebraska–

Lincoln.

Ken Rebeck is Professor of Economics at St. Cloud State University (Minnesota).

be reproduced in any form by any means without the prior written permission from the publisher.

Printed in the United States of America.

TABLE OF CONTENTS

Page

FOREWORD........................................................................................................ iii

EXAMINER’S MANUAL

1. Test Development ....................................................................................1

2. The Content and Structure of the Test .....................................................4

3. Uses of the Test .......................................................................................8

4. Administering the Test ............................................................................9

5. Technical Data .......................................................................................11

6. Item Rationale .......................................................................................16

7. References .............................................................................................25

LIST OF TABLES

Table 1. TFK Standards and Benchmarks ....................................................5

Table 2. Aggregate Statistics for the Student Sample Taking the TFK ......11

Table 3. Percentiles for TFK Scores ...........................................................12

Table 4. Item Discrimination and Percentage of Correct Responses .........13

Table 5. Percentage Response to Each Alternative ....................................14

APPENDICES

Appendix 1. Personnel for the TFK ...............................................................26

Appendix 2. Schools Participating in TFK testing ........................................27

Appendix 3. Answer Form and Scoring Key ................................................28

iii

FOREWORD

The Council for Economic Education (CEE) is deeply committed to providing

the highest quality instructional products for teachers to use in their classrooms to

give their students the educational tools for understanding personal finance.

Providing teachers with up-to-date assessments are part of the total package. The

Test of Financial Knowledge: Examiner’s Manual offers teachers and test admin-

istrators the essential information they need in order to test the understanding of

upper middle school or lower high school students (eighth and ninth graders) on

personal finance and compare the results with other students across the nation.

The Test of Financial Knowledge is one of three CEE standardized assess-

ments for personal finance. The other two assessments are the Test of Financial

Literacy for upper high school students (eleventh and twelfth graders) and the Basic

Finance Test for upper elementary school or lower middle school students (fifth

and sixth graders). All three assessments are available online for teacher use with

students. The CEE also has a test bank of questions for teachers to use to construct

their own tests for diagnostic purposes. Information about the website can be found

at: http://www.councilforeconed.org/resource/online-assessment-center/

The CEE is truly indebted to many individuals who shared their multitude of

talent and their precious time to write, review, and revise items for the Test of Fi-

nancial Knowledge that are based on the content specifications in the CEE’s Na-

tional Standards for Financial Literacy (2013). Special thanks go to William Wal-

stad for directing the project for the CEE and undertaking the test development

work with his associate director, Ken Rebeck. Members of the National Advisory

Committee (acknowledged by name and institution on page 3 and in Appendix 1)

also provided invaluable assistance in preparing and revising test items for the test

drafts.

The CEE gratefully acknowledges the generous funding and support of PwC

for making this accomplishment possible.

Council for Economic Education

TEST OF FINANCIAL KNOWLEDGE: EXAMINER’S MANUAL

The Test of Financial Knowledge (TFK) is a

standardized test for measuring the achievement of

upper middle school or lower high school students

in units or courses that emphasize content and in-

struction in personal finance. The test should be a

valuable tool for assessing what students know

about the basics of personal finance and related

concepts in economics or business.

The TFK Examiner’s Manual provides test us-

ers with the information they need to administer

the test and interpret the results. It has three major

objectives. First, it gives test users a detailed de-

scription of the test content along with item ration-

ales so they can understand how the test covers im-

portant content specified in national standards for

personal finance. Second, it explains how the test

should be administered to students and discusses

the possible uses of the test for assessment and in-

struction. Third, it presents statistical evidence on

the reliability and validity of the test as a measure

achievement in personal finance that would typi-

cally be taught at the upper middle school or lower

high school levels.

1. TEST DEVELOPMENT

In 2013, the Council for Economic Education

(CEE) published the National Standards for Fi-

nancial Literacy (hereafter FL Standards). This

document describes six major content areas for

personal finance instruction in the nation’s

schools: (1) earning an income; (2) buying goods

and services; (3) saving; (4) using credit; (5) finan-

cial investing; and, (6) protecting and insuring fi-

nancial assets. Associated with these six standards

are 144 benchmarks that explain in more detail

what students should know about the standards and

how to use this knowledge by the end of the fourth,

eighth, and twelfth grades.

At the time of publication of the FL Standards,

no standardized tests were available to assess stu-

dent understanding of these standards. The CEE

therefore sought funding for a project to create

three tests, one for use in high school, another for

middle school, and the third for elementary school.

The CEE secured funding from PwC in sum-

mer 2014 for the development of the three stand-

ardized tests in personal finance. The PwC support

for the CEE also included funding for the develop-

ment of an online assessment center to house all

the CEE standardized tests in both economics and

personal finance. In addition, a test bank of ques-

tions from CEE publications in personal finance

and economics would be added to the online as-

sessment center so that teachers could create their

own classroom tests for use with their students.

This Examiner’s Manual only describes the test

development phase of the project and primarily fo-

cuses on the TFK.

Test Specifications. Several decisions were

made prior to or during test development that af-

fected the content and features of the three new as-

sessments. First, each test was designed to assess

student understanding of the materials contained in

the FL Standards. The specific content for test

questions would be drawn from the benchmarks

for each standard, but sorted by grade level to con-

struct the three new tests. The TFK content would

emphasize what students should know by eighth

grade as described in the 49 eighth grade bench-

marks. The high school test, called the Test of Fi-

nancial Literacy (TFL), would assess the 63

twelfth grade benchmarks. The elementary test, ti-

tled the Basic Finance Test (BFT), would use the

32 fourth grade benchmarks for test content.

Second, the design of the three personal fi-

nance tests would be similar to the CEE’s three

standardized tests in economics. These tests were

prepared to assess standards and benchmarks in the

CEE’s Voluntary National Content Standards in

Economics (CEE 2010). They include the high

school Test of Economic Literacy (TEL), the mid-

dle school Test of Economic Knowledge (TEK),

and elementary school Basic Economics Test

(BET). The new tests also would complement the

high school, middle school, and elementary school

assessment instruments for the CEE’s Financial

Fitness for Life (FFFL) curriculum. The content

for the new tests, however, would be based on FL

Standards and thus would not be tied to an assess-

ment of any particular curricula.

Third, for norming or test data purposes the

TFL, TFK, and BFT would be administered to

samples of students at several grade levels to cover

the ranges for the major transition points in precol-

lege education as was the case with the three stand-

ardized economics test (TEL, TEK, and BET).

The TFL would assess student understanding at or

near the end of high school (eleventh and twelfth

grades). The TFK would be used for measuring

student achievement at the end of middle school or

the beginning of high school (eighth and ninth

grades). The BFT would test students at the end of

elementary school or the beginning of middle

school (fifth and sixth grades).

Fourth, a multiple-choice format would be

used for each instrument so a test would sample a

wider range of the content domain as specified in

the benchmarks for the FL Standards. This deci-

sion was important because it permitted a suffi-

cient number of test items to be distributed across

each of the six standards and the many benchmarks

at each grade level. This format would make the

most efficient use of the available resources for as-

sessments, and it was consistent with the practice

adopted for the three standardized economics tests

(TEL, TEK, and BET).

Fifth, each test was to be constructed as an

achievement test and not a speed test. The number

of multiple-choice questions included on each one

would be limited to what most students could rea-

sonably be expected to answer in about a 45-mi-

nute class period. This time period was well

within the time length of most classes and would

allow ample opportunity for teachers to make ar-

rangement within a classroom for giving test in-

structions and administering the test. Most ques-

tions on each instrument would not be overly com-

plex so that most test items could be answered in

less than a minute, on average. More time, how-

ever, would be allocated for completion of the ele-

mentary test because some elementary students

may have more difficulty with reading. Past expe-

rience with the three standardized economics tests

indicated that most students had sufficient time to

answer the 45 TEL items, the 40 TEK items, and

the 30 BET items. Accordingly, the acceptable

ranges for the number of items on a test were set at

45 to 50 items for the TFL, 40 to 45 for the TFK,

and 30 to 35 for the BFT.

Personnel. William Walstad, Professor of

Economics at the University of Nebraska-Lincoln

and Editor of the Journal of Economic Education,

was the director of the test project. His responsi-

bility was to select the item writers, conduct meet-

ings, develop test items, prepare the final tests,

oversee statistical analysis, and write an exam-

iner’s manual for each test. Ken Rebeck, Professor

of Economics at St. Cloud State University, was

the associate director for the project. His job was

to work with Walstad on the item development,

preparation of the final tests, conduct the statistical

analysis, and co-author an examiner’s manual for

each test.

Both Walstad and Rebeck have extensive ex-

perience in the collaborative development of na-

tional tests in economics and personal finance.

Their past work with personal finance assessments

included preparation of three FFFL tests. They

also directed projects to prepare new editions of

the TEL, TEK, and BET, and co-authored exam-

iner’s manuals for each of those tests. In addition,

they had conducted a research study on the effec-

tiveness of a high school curriculum in personal fi-

nance (Financing Your Future) (Walstad, Rebeck,

and MacDonald 2010). Walstad served on the

writing committee for the FL Standards. Rebeck

has made many presentations at teacher workshops

on personal finance and economics through the

Minnesota Council on Economic Education.

The CEE representative for the project was

Kevin Gotchet, a director of programs at the CEE.

He previously worked on the CEE’s Excellence in

Economic Education project, which was funded by

a multi-year grant from the U.S. Department of

Education. Gotchet worked with Walstad on se-

lection of the personnel for the project, managed

the budget, helped organize meetings, arranged for

data collection though the CEE’s online assess-

ment center, and monitored progress of the project.

In summer 2014, Walstad and Gotchet created

a National Advisory Committee (NAC) for the test

project that included five independent members,

who together had expertise in classroom instruc-

tion in personal finance and economics, had con-

ducted precollege teacher training in personal fi-

nance and economics, and were experienced in

test-item writing. William Bosshardt, Associate

Professor of Economics and Director of the Center

for Economic Education at Florida Atlantic Uni-

versity, has many years of experience in providing

training in economics and personal finance for pre-

college teachers. He also had served on test devel-

opment committees for the TEL, TEK, and BET

and was the project director in charge of writing

the CEE’s FL Standards. Elizabeth Breitbach is

Clinical Assistant Professor of Economics at the

University of South Carolina. Her research and

publications focus on the effect of financial liter-

acy on banking participation. Brenda Cude is a

professor in the Department of Financial Planning,

Housing, and Consumer Economics at the Univer-

sity of Georgia. She teaches courses for under-

graduates on personal finance and conducts re-

search on the financial literacy of college students.

Andrew Hill is an economic education advisor at

the Philadelphia Federal Reserve Bank. He also is

a team leader for a teacher training program in the

Philadelphia area for a high school course in per-

sonal finance (Keys to Financial Success) and was

a writer for the FL Standards. Bonnie Meszaros,

Associate Director at the Center for Economic Ed-

ucation and Entrepreneurship at the University of

Delaware, provides training in economics and per-

sonal finance to area teachers. She has served on

test development committees for the BET and

TEK and was a writer for the FL Standards. Each

member of the NAC, therefore, had valuable work

experience and knowledge to contribute to test de-

velopment.

Item Writing. The first meeting of the NAC

with the project directors was held for two days in

mid-August, 2014 in Atlanta, Georgia. Each NAC

member and the two directors were responsible for

supplying about 40–50 test items for review at the

meeting. The items could be new or drawn from

various sources, such as CEE-published curricula

in personal finance or non-CEE instructional ma-

terial. Items from CEE or other source material,

however, would only serve as an “example” that

could be used for writing a new item on the same

content. The project requirement for any item in-

cluded on one of the tests was that the item be new.

The different stages of review and editing of items

throughout test development would ensure that re-

quirement was met for all test items.

All of the 335 items submitted for review by

the NAC members and the two project directors

were coded by standard and benchmark using the

CEE’s FL Standards. The coding permitted items

to be sorted to identify content gaps where there

were no test items and where new ones needed to

be written. The pool of items also was rated using

four categories: (1) accept as is; (2) requires minor

revision; (3) requires major revision; and (4) reject

and do not use. Most items received a 2 or 3 rating

from the NAC and project directors. The group

made changes to items that could be easily revised

and left other items for revision after the meeting.

Some new items also were written at the meeting.

The final set of items selected for further revi-

sion were then assigned to the group members to

work on at their home locations. For each stand-

ard, one committee member was assigned primary

responsibility for revising items for that standard

and filling content gaps with a few new items. A

second committee member would then review the

revised items from the first committee member and

offer further comments and changes. At the com-

pletion of the revision process, the revised items

from all standards were compiled by the project di-

rector for further review.

The second NAC meeting with the two project

directors was held in Dallas in October 2014. The

primary purpose for this day-long meeting was to

review and revise all items in the question pool.

Items that could be changed easily were revised by

the group at the meeting. Other items that required

more work were assigned to committee members

to change after the meeting and then be sent to the

project director and associate director for further

review.

In November, the revised questions from the

Dallas meeting and the follow-up work at home

sites were compiled by the project director. The

total of 318 possible items included 53 for standard

1, 38 for standard 2, 42 for standard 3, 69 for stand-

ard 4, 60 for standard 5, and 56 for standard 6. The

set of items were then rated by the NAC and the

project directors using the 1–4 rating scale previ-

ously described.

The project director and associate director met

in Sioux Falls, South Dakota, on January 16–17,

2015, to prepare a draft of each test. For this draft-

ing process, the 318 possible items were sorted by

standard, and then by grade level and benchmark

within a standard. The project directors then se-

lected what they thought were the best items for

each test based on the grade level of items, the

quality of the items, the 1–4 ratings from the re-

view process, and the distribution of test content

across benchmarks. This work produced initial

drafts of the TFL, TFK, and BFT.

After the meeting, the project directors contin-

ued to refine each draft. Nine new items were writ-

ten and added to the TFL to cover missing bench-

marks or improve the content distribution across

standards. Ten new items were written and added

to the TFK and nine new items were written and

added to the BFT for similar reasons.

Further refinements were then made to each

draft. The length of the item options were ordered

from shortest to longest, or if necessary from long-

est to shortest, to eliminate any clues to a correct

answer based on option length. To the extent pos-

sible, the correct answer was randomized across

the four options (A, B, C, or D) so that each one

was about equally likely to be the correct answer.

The names for individuals in item stems and the

four options were split about equally between

males and females. Names also were updated to

use the most popular ones as found in recent birth

lists of names. Each item was carefully checked

for correct grammar and spelling. Each test also

was administered to three students for review, one

for each grade level, to get further feedback and to

check on the appropriateness of items.

In February 2015, a near-final draft of each test

was sent to members of the NAC for their last re-

view and comment. The main request to the NAC

was to make sure that there was only one best or

correct answer to each test item. The review by

the NAC uncovered a few minor wording prob-

lems with questions that were corrected, but found

no problem with the correct answers.

In late February 2015 each test was sent by the

project director to the CEE for entry into the CEE

Online Assessment Center. In February 2016 the

accumulated data from the online testing over a

year was used to identify five TFL and five TFK

items that appeared too hard or did not capture

knowledge of the underlying benchmarks as well

as items on the rest of the tests. The final result of

the revision work was a 45-item TFL covering 45

of the 63 twelfth-grade benchmarks (71 percent of

benchmarks), a 40-item TFK covering 39 of the 49

eighth-grade benchmarks (80 percent of bench-

marks), and a 35-item BFT covering all of the 32

fourth-grade benchmarks (100 percent of bench-

marks).

The last section of this Examiner’s Manual

presents the 40 test items for the TFK and gives a

written rationale for the correct answer. As will be

discussed in the next section, there was good cov-

erage of the personal finance concepts to establish

the content validity of the TFK.

2. THE CONTENT AND STRUCTURE OF

THE TEST

The FL Standards provides a description of

what experts in personal finance and economics

consider to be core content in personal finance that

should be taught by the eighth grade. Table 1

shows the standards and the distribution of items

across the eighth grade benchmarks for the TFK.

TABLE 1. TFK Standards and Benchmarks

Standard 1: Earning Income

People make choices to protect themselves from the financial risk of lost income, assets, health, or identity.

They can choose to accept risk, reduce risk, or transfer the risk to others. Insurance allows people to transfer

risk by paying a fee now to avoid the possibility of a larger loss later. The price of insurance is influenced by

an individual’s behavior.

8 items or

20 %

Income Benchmarks: Grade 8

Item No.

1. Careers are based on working at jobs in the same occupation or profession for many years. Different ca-

reers require different education and training.

2. People make many decisions over a lifetime about their education, jobs, and careers that affect their in-

comes and job opportunities.

3. Getting more education and learning new job skills can increase a person’s human capital and productiv-

ity.

4. People with less education and fewer job skills tend to earn lower incomes than people with more educa-

tion and greater job skills.

5. Investment in education and training generally has a positive rate of return in terms of the income that

people earn over a lifetime.

6. Education, training, and development of job skills have opportunity costs in the form of time, effort, and

money.

7. People often use a portion of their savings to help themselves or their family members build human capi-

tal through education or job training.

8. Entrepreneurs take the risk of starting a business because they expect to earn profits as their reward, de-

spite the fact that many new businesses can and do fail. Some entrepreneurs gain satisfaction from work-

ing for themselves.

9. Interest, dividends, and capital appreciation (gains) are forms of income earned from financial invest-

ments.

10. Some people receive income support from governments because they have low incomes or qualify in

other ways for government assistance.

11. Social Security is a government program that taxes the income of current workers to provide retirement,

disability, and survivor benefits for workers or their dependents.

Standard 2: Buying Goods and Services

People cannot buy or make all the goods and services they want; as a result, people choose to buy some

goods and services and not buy others. People can improve their economic well-being by making informed

spending decisions, which entails collecting information, planning, and budgeting.

6 items or

15%

Buying Standard Benchmarks: Grade 8

Item No.

1. When making choices about what to buy, consumers may choose to gather information from a variety of

sources. The quality and usefulness of information provided by sources can vary greatly from source to

source. While many sources provide valuable information, some sources provide information that is de-

liberately misleading.

2. By understanding a source’s incentives in providing information about a good or service, a consumer

can better assess the quality and usefulness of the information.

3. People choose from a variety of payment methods in order to buy goods and services.

4. Choosing a payment method entails weighing the costs and benefits of the different payment options.

5. A budget includes fixed and variable expenses, as well as income, saving, and taxes.

6. People may revise their budget based on unplanned expenses and changes in income.

Standard 3: Saving

Saving is the part of income that people choose to set aside for future uses. People save for different reasons

during the course of their lives. People make different choices about how they save and how much they save.

Time, interest rates, and inflation affect the value of savings.

8 items or

20%

TABLE 1. TFK Standards and Benchmarks

Saving Benchmarks: Grade 8

Item No.

1. Banks and other financial institutions loan funds received from depositors to borrowers. Part of the inter-

est received from these loans is used to pay interest to depositors for the use of their money.

2. For the saver, an interest rate is the price a financial institution pays for using a saver’s money and is

normally expressed as a percentage of the amount saved.

3. Interest rates paid on savings and charged on loans, like all prices, are determined in a market.

4. When interest rates increase, people earn more on their savings, and their savings grow more quickly.

5. Principal is the initial amount of money upon which interest is paid.

6. Compound interest is the interest that is earned not only on the principal but also on the interest already

earned.

7. The value of a person’s savings in the future is determined by the amount saved and the interest rate.

The earlier people begin to save, the more savings they will be able to accumulate, all other things equal,

as a result of the power of compound interest.

8. Different people save money for different reasons, including large purchases (such as higher education,

autos, and homes), retirement, and unexpected events. People’s choices about how much to save and for

what to save change considerably over the course of their lives and are based on their tastes and prefer-

ences.

9. To assure savers that their deposits are safe from bank failures, federal agencies guarantee depositors’

savings in most commercial banks, savings banks, and savings associations up to a set limit.

Standard 4: Using Credit

Credit allows people to purchase goods and services that they can use today and pay for those goods and ser-

vices in the future with interest. People choose among different credit options that have different costs. Lend-

ers approve or deny applications for loans based on an evaluation of the borrower’s past credit history and

expected ability to pay in the future. Higher-risk borrowers are charged higher interest rates; lower-risk bor-

rowers are charged lower interest rates.

6 items or

15%

Using Credit Benchmarks-Grade 8

Item No.

1. People who apply for loans are told what the interest rate on the loan will be. An interest rate is the price

of using someone else’s money expressed as a percent of the loan principal.

2. The longer the repayment period on a loan and the higher the interest rate on the loan, the larger is the

total amount of interest charged on a loan.

3. A credit card purchase is a loan from the financial institution that issued the card. Credit card interest

rates tend to be higher than rates for other loans. In addition, financial institutions may charge significant

fees related to a credit card and its use.

4. Borrowers who use credit cards for purchases and who do not pay the full balance when it is due pay

much higher costs for their purchases because interest is charged monthly. A credit card user can avoid

interest charges by paying the entire balance within the grace period specified by the financial institu-

tion.

5. Various financial institutions and businesses make consumer loans and may charge different rates of in-

terest.

6. Interest rates on loans fluctuate based on changes in the market for loans.

7. Lenders charge different interest rates based on the risk of nonpayment by borrowers. The higher the

risk of nonpayment, the higher the interest rate charged. The lower the risk of nonpayment, the lower the

interest rate charged.

8. People can use credit to finance investments in education and housing. The benefits of using credit in

this way are spread out over a period of time and may be large. The large costs of acquiring the educa-

tion or housing are spread out over time as well. The benefits of using credit to make daily purchases of

food or clothing are short-lived and do not accumulate over time.

TABLE 1. TFK Standards and Benchmarks

Standard 5: Financial Investing

Financial investment is the purchase of financial assets to increase income or wealth in the future. Investors

must choose among investments that have different risks and expected rates of return. Investments with

higher expected rates of return tend to have greater risk. Diversification of investment among a number of

choices can lower investment risk.

6 items or

15%

Financial Investing: Benchmarks: Grade 8

Item No.

1. Financial assets include a wide variety of financial instruments including bank deposits, stocks, bonds,

and mutual funds. Real estate and commodities are also often viewed as financial assets.

2. Interest is received from money deposited in bank accounts. It is also received by owning a corporate or

government bond or making a loan.

3. When people buy corporate stock, they are purchasing ownership shares in a business. If the business is

profitable, they will expect to receive income in the form of dividends and/or from the increase in the

stock’s value. The increase in the value of an asset (like a stock) is called a capital gain. If the business is

not profitable, investors could lose the money they have invested.

4. The price of a financial asset is determined by the interaction of buyers and sellers in a financial market.

5. The rate of return on financial investments consists of interest payments, dividends, and capital apprecia-

tion expressed as a percentage of the amount invested.

6. Financial risk means that a financial investment has a range of possible returns, including possibilities of

actual losses. Higher-risk investments have a wider range of possible returns.

7. The rate of return earned from investments will vary according to the amount of risk. In general, a trade-

off exists between the security of an investment and its expected rate of return.

Standard 6: Protecting and Insuring

People make choices to protect themselves from the financial risk of lost income, assets, health, or identity.

They can choose to accept risk, reduce risk, or transfer the risk to others. Insurance allows people to transfer

risk by paying a fee now to avoid the possibility of a larger loss later. The price of insurance is influenced by

an individual’s behavior.

6 items or

15%

Protecting and Insuring Benchmarks: Grade 8

Item No.

1. Personal financial risk exists when unexpected events can damage health, income, property, wealth, or

future opportunities.

2. Insurance is a product that allows people to pay a fee (called a premium) now to transfer the costs of a

potential loss to a third party.

3. Insurance companies analyze the outcomes of individuals who face similar types of risk to create insur-

ance contracts (policies). By collecting a relatively small amount of money, called a premium, from each

policyholder on a regular basis, the company creates a pool of funds to compensate those individuals

who experience a large loss.

4. Self-insurance is when an individual accepts a risk and saves money on a regular basis to cover a poten-

tial loss.

5. Insurance policies that guarantee higher levels of payment in the event of a loss (coverage) have higher

prices.

38, 39

6. Insurance companies charge higher premiums to cover higher-risk individuals and events because the

risk of monetary loss is greater for these individuals and events.

7. Individuals can choose to accept some risk, but also take steps to avoid or reduce risk, or transfer risk to

others through the purchase of insurance. Each option has different costs and benefits.

8. Social networking sites and other online activity can make individuals vulnerable to harm caused by

identity theft or misuse of their personal information.

Several points should be remembered when

evaluating the coverage of the test across personal

finance standards in Table 1. First, the TFK is not

designed as a test of each standard or benchmark,

but of overall understanding of personal finance.

There are too few test items per standard (6 to 8)

to make a sound judgment about mastery of a

standard. It also would be inappropriate to evalu-

ate student achievement on a benchmark because

there is only one item per benchmark. The test,

however, does provide a broad and representative

sampling of the content domain across all stand-

ards in personal finance and thus can be used to

assess overall student achievement in personal fi-

nance.

Second, the distribution in Table 1 reflects the

test developers’ best judgment of the association

of an item with a particular benchmark. This clas-

sification of a test item by benchmark, however,

may not be exact because content in the stem and

the alternative options of an item might be related

to content in several benchmarks. The allocation

of an item to a particular benchmark as shown in

Table 1 reflects what the test developers consider

to be an item’s primary relationship to a bench-

mark even if there are secondary associations.

Third, the distribution of test items reflects the

test developers’ interpretation of what ought to be

included in a general test of personal finance for

upper middle school or lower high school students

(eighth or ninth graders) based on the content out-

lined by the FL Standards. The number of items

by standard were largely determined by the num-

ber of eighth grade benchmarks for a standard. For

example, the standards “Earning Income” and

“Saving” had more benchmarks than the other

standards, and therefore had more items covering

these two standards.

Fourth, test items can be classified by cogni-

tive level. The problem with using a complex clas-

sification scheme with five or six cognitive levels

to rate items is that the ratings can be somewhat

arbitrary. Such fine distinctions also may not be

of much value for a test in personal finance which

focuses on knowledge and application. Thus, the

issue of cognitive level can be addressed for the

TFK by sorting items into the two major catego-

ries, one at the lower level (knowledge or compre-

hension) and one at a higher level (application that

might include analysis and evaluation). A review

of the TFK shows about 15 knowledge or compre-

hension items (7, 8, 9, 10, 11, 13, 15, 16, 19, 20,

24, 27, 29, 31, and 39) and 25 application items.

Thus about 38 percent of items are knowledge or

comprehension and 62 percent are application.

3. USES OF THE TEST

To Measure Student Understanding

The TFK was designed primarily for assessing

and improving the quality of upper middle or

lower high school teaching of personal finance.

There are several ways to use it for this objective.

AS A PRETEST

The TFK can be administered as a pretest at the

outset of a unit of instruction in personal finance

or at the beginning of a semester to assess the stu-

dents’ prior knowledge of personal finance con-

cepts. This pretest use is important to middle

school and high school teachers because some

school districts provide some instruction in per-

sonal finance in earlier grade levels. If this prior

instruction in personal finance has been effective,

many students may have already acquired some

knowledge or understanding of the subject..

To determine areas of students’ relative

strength or weakness in personal finance, teachers

can compare the scores of their students with the

scores for each test item provided in this manual.

Small differences between scores reported for a

given question in this manual and those obtained

in the classroom should not be emphasized.

Certain kinds of comparisons may prove use-

ful. For instance, if the average score of students

on the test is as good as or better than these pub-

lished scores, significantly lower scores on se-

lected items may indicate areas of personal finance

the teacher may wish to emphasize in subsequent

teaching or classroom work.

The manual also provides brief rationales that

explain the correct answer for each question and

why other answers are incorrect. Teachers should

read those rationales before deciding whether the

particular concept tested deserves greater attention

in the classroom. If still in doubt, teachers should

refer to the relevant benchmarks in the FL Stand-

ards (see code listed with each item rationale) as

listed in Table 1 or consult the FL Standards pub-

lication.

AS A POSTTEST

The TFK can be used at the end of a semester

or unit of instruction to measure the extent to

which understanding has improved. Posttest

scores for a given group of students may be com-

pared to their pretest scores and to the published

scores for students in the tables presented later in

this manual. A pretest and posttest use of the TFK

should help to provide evidence of the effect of

classroom instruction in improving knowledge and

understanding of personal finance.

When used as a posttest, the TFK should be ad-

ministered early enough to allow one or two class

periods to be used for discussion of test scores and

results. The teacher can take advantage of the stu-

dents’ natural interest in their relative standing in

the class and in relation to the published results in

this manual.

Item Discussion. When students cannot an-

swer a question or find it most difficult to select

the correct answer, they are often interested in

what the correct answer is and why it is correct.

Students’ incorrect responses tend to be concen-

trated on specific topics. It is on those topics that

review time can be spent most profitably, since the

clustering of errors is an indication of confusion

about the topic. The teacher may wish to read the

rationale for each correct answer from the Item Ra-

tionale given in a later section of the manual or re-

fer the relevant benchmarks in the FL Standards.

Discussion can then continue between students

and teacher, using educational materials on per-

sonal finance for further information.

Caution should be used in reading or para-

phrasing item answers from the item rationale, par-

ticularly if the test is used on a pre- and posttest

basis. After posttesting, reading the correct re-

sponse and its rationale should cause no harm and

is likely to be effective as a teaching/learning ac-

tivity. This practice, however, should not be fol-

lowed after pretesting if a subsequent posttest is to

be administered. The reason is that the same items

would be used both as a pretest and a posttest, and

students would know the correct answers based on

the pretest discussion of items, thus invalidating a

pre- and posttest comparison.

DURING A COURSE

A third use of the TFK is to administer it mid-

way during a course or unit of instruction and to

use the results for formative evaluation purposes.

Data on student performance near the halfway

point can then be used to alter instructional strate-

gies for the balance of the course or unit, thereby

more closely reaching the instructional goal—

greater student understanding of personal finance.

It should be remembered that if whole or parts

of the TFK are administered during a course and

also as a posttest, it is likely that some student

“learning” will result because students will then

answer a test item twice. Students may “remem-

ber” items from one test administration to the next,

thus making any comparison invalid.

4. ADMINISTERING THE TEST

General Instructions

The TFK was designed for middle school and

high school teachers or school administrators to

use with students taking courses or units in per-

sonal finance. The decision about whether the

TFK should be used to measure student achieve-

ment in courses or units in personal finance should

be based on a careful review of the TFK test items

and course content to make sure the test fits the

personal finance that is taught in upper middle

school or lower high school grades.

Although the instructions that follow will be

adequate for most situations, it is suggested that

the examiner carefully look over the test before the

testing session begins to anticipate any problems.

Unless standard procedures are followed when the

test is given to students, the results obtained may

not be strictly comparable with the published re-

sults in this manual.

The room in which the test is to be adminis-

tered should be well-lighted, well ventilated, and

quiet. The students should have sufficient working

space. Students should be seated so as to minimize

opportunities to see other’s answers.

The test can be administered either online or in

paper form. Teachers or administrators who give

the online test should be familiar with online test-

ing procedures. They should make sure that every

student has proper access to a working computer

or terminal. It also is helpful to talk with an in-

structional technology specialist at a school about

the optimal computer use for classes, preparing

students for online tests, and monitoring progress.

Arrangements then should be made for the online

testing of students through the CEE’s Online As-

sessment Center (OAC), which is found at

www.councilforeconed.org/resource/online-as-

sessment-center/.

Those educators who give the test in paper

form can print out a copy at the CEE’s OAC and

then make copies for students. They also can print

out and make copies of an answer sheet. (A fac-

simile of an answer sheet is provided as an appen-

dix to this manual.) If answers are to be machine-

scored, the answer sheets must be compatible with

the scoring equipment, and the students must mark

the sheets with the appropriate pencils (usually No.

2 lead). Students should not use a pen because it

is difficult to change answers or have items ma-

chine scored.

All printed test materials should be counted

and assembled prior to the testing session with an

answer sheet under the front cover of every test

booklet so that both answer sheet and test booklet

can be distributed together, saving testing time.

Each student should receive only one booklet.

When administering the test—either online or

in paper form—give these two general instructions

to students.

1. This test is designed to measure your under-

standing of personal finance. Not all students

who take this test will have taken a separate

course or unit in personal finance, but most

have learned something about the subject in

their other courses, through reading newspa-

pers, listening to the radio, watching television,

or browsing the Internet. You also may have

discussed personal finance issues with a par-

ent, guardian, or other adult. These questions

will measure how well you understand per-

sonal finance and its application.

2. You should try to answer every question by

marking what you think is the best choice.

You might not know the answers to some ques-

tions, but use the information you do have to

eliminate those answers you think are incorrect

and select your best answer. Work at a com-

fortable speed, but do not spend too much time

on any one item. The test consists of 40 ques-

tions or incomplete statements, for which you

should choose the one best answer from the

four possible answers. With some items, more

than one answer may appear to be correct, but

choose the best answer from one of the four.

Timing the Test

The TFK requires about 40 minutes of testing

time for middle school or high school students, de-

pending on group ability. If testing is done in a

class period that is shorter than 40 minutes, and the

time cannot be extended, allowance should be

made for this factor when test scores are evaluated

and compared to these published test results.

The TFK was designed as a power test rather

than as a speed test, so it is probable that most stu-

dents will complete it in less than 40 minutes.

Since many class periods are set at 45 minutes, the

testing should begin as soon as possible after test

instructions are given at the start of class.

Scoring the Test

The score for the TFK is the number of correct

responses. The maximum possible score is 40. If

the test is taken online, then the system should re-

port the score for each student. If the test is taken

in print form, then an answer sheet may be scored

by hand or by machine.

To score the test by hand, use the key and fac-

similes of the answer sheet in Appendix 3. Scan

each answer sheet to make certain the student

marked only one answer for each question; if more

than one answer has been marked, the response to

that question is considered wrong. The raw score

is the total number of correct answers.

Machine-scoring of tests often produces a

printout of the student roster with raw scores and

percentiles for the scores by group tested. In addi-

tion, the group mean, standard deviation, and a fre-

quency distribution are often provided. Such data

can be useful in the interpretation of results.

5. TECHNICAL DATA

Student Sample

The TFK was administered to a sample com-

posed primarily of seventh- and eighth-grade stu-

dents. To participate in the testing, teachers regis-

tered their class of students at the CEE’s Online

Assessment Center. They then arranged to have

their students take the test online through comput-

ers at their school. The period for student testing

started in spring of the 2014-2015 school year,

continued through fall of the 2015-2016 school

year, and ended by the middle of February 2016.

Most of these students had received instruction in

personal finance either during the school year or in

a prior school year. No claim is made that this

small sample of students tested is representative of

the target student population throughout the nation

because it was not possible to obtain a large, strat-

ified random sample of students. The results, how-

ever, are suggestive of one that would be obtained

from students at these grades.

Table 2 reports the aggregate statistics ob-

tained from the 181 students who took the test.

The data were collected from classes taught by

teachers in the six schools listed in Appendix 2.

TABLE 2. Aggregate Statistics for the

Student Sample Taking the TFK

Sample Size (number of students) 181

Reliability

Coefficient alpha .83

Standard error of measurement 2.85

Scores (40 test items)

Mean 17.39

Standard Deviation 6.97

The sample data should not be considered as

indicating the absolute standard of achievement in

personal finance because it is not known what was

specifically taught or how much time was spent in-

struction. Rather, the sample results provide a rel-

ative standard to aid teachers in comparing their

students with other students who took the test. The

comparisons will be meaningful only if to the ex-

tent that composition of the student body in any

class is similar to the sample tested.

Percentile Tables

Table 3 presents the raw test scores and corre-

sponding percentile ranks from the sample of sev-

enth- and eighth-grade students taking the TFK

online. The ranks were obtained by calculating the

total percentage of students who scored at or below

a certain raw score. The table permits the conver-

sion of raw scores to percentile ranks.

Percentile ranks allow a test user to compare

how his or her class, or an individual student, per-

formed relative to this sample of students across

these five states. For example, a student who ob-

tains a raw score of 20 on the TFK has a percentile

rank of 68 among a sample of seventh- and eighth-

grade students, most of whom received some form

of personal finance instruction. Therefore, a stu-

dent with a raw score of 20 is performing as well

as, or better than, 68 percent of these students.

Item Difficulty and Discrimination

Test administrators may want to know how

their students performed on certain items. This in-

formation would be particularly important in cases

where the teacher covered only some of the con-

cepts or topics included in the test. Information on

item difficulty and discrimination will help teach-

ers evaluate student performance on particular

items.

Item Difficulty. Table 4 shows the percentage

of correct responses on each item. This percentage

is an estimate of the difficulty of an item. This per-

centage can range from 0 to 100 percent. Data on

item difficulty should be interpreted with care be-

cause it depends on many things besides the com-

plexity of the concept being tested. Such matters

as classroom emphasis on content, the closeness or

plausibility of incorrect alternatives or “distrac-

tors” and the relation of the item content to stu-

dents’ outside activities, experiences, reading, and

awareness may also affect item difficulty. It is

worth emphasizing that undue attention should not

be placed on small differences between the per-

centage reported in this manual and those obtained

in the classroom.

Each question on the TFK has four possible

choices: one correct answer and three distractors.

Pure chance would dictate an expected correct

score of 25 percent on the test for those who had

no knowledge of personal finance. If some stu-

dents score below 25 percent on the test (or about

10 or less correct answers), their answer sheets in

particular should be carefully checked for system-

atic errors in test marking, scoring, or test admin-

istration. However, if a group of students know

nothing about personal finance, probability will

dictate that some students will earn scores of 10 or

below even without errors.

Item Discrimination. Also reported in Table

4 is the corrected item-to-total score correlation or

point-biserial correlation. It is the correlation be-

tween the students’ total test scores (less the par-

ticular item) and their scores on an item.

TABLE 3: Percentiles for TFK Scores

Raw Score

Percentile

The correlation ranges from -1 to 1. The

higher the coefficient, the better the item functions

as a discriminator between those students who

know more or know less personal finance. If this

coefficient is zero, it would indicate that this item

fails to discriminate between those with more and

less knowledge of personal finance.

In general, if an item has a discrimination co-

efficient below 0.20, the item may either be a weak

discriminator or it may indicate that there is lim-

ited classroom coverage of the tested concept.

Questions with a negative coefficient indicate that

more lower-scoring students get the question right

than do higher-scoring students. Item discrimina-

tion does not adjust for the reading or general abil-

ity of students. Thus, higher ability students may

do well on a question regardless of whether they

had personal finance instruction.

Item Responses

Table 5 shows the percentages of students who

selected one of the four options for each TFK item,

with the correct response percentage in bold face

and with an asterisk. Analysis of item responses

can be useful. For example, if a large percentage

of students answered A when the correct answer

was C, distractor A should be studied to determine

why students selected it. The item rationale found

in Section 6 provides explanations of correct an-

swers and why other answers are incorrect to aid

in interpreting results.

Reliability

The reliability of a test is the degree of con-

sistency with which a test measures student perfor-

mance or achievement. For example, two students

taking the same test are likely to obtain different

scores, but each student taking the test again (with-

out intervening instruction in the subject tested)

should obtain about the same score as the first

time. Many factors (including practice in taking

the test or guessing) cause changes in student per-

formance from day to day. As a result, a test can

never measure a student’s achievement perfectly

(that is, obtain a student’s “true” score).

TABLE 4. Item Discrimination and Per-

centage of Correct Responses: TFK

Item

Correct

Answer

Corrected

Item-Total

Correlation

Percent

Correct

.35

.25

.44

.39

.27

.22

.25

.32

.24

.47

.44

.41

.21

.33

.37

.25

.36

.29

.48

.35

.50

.42

.34

.13

.25

.34

.33

.07

.08

.30

.17

.08

.11

.32

.19

.39

.14

.33

.50

SEM. It is possible to estimate the amount of

variation in test scores due to measurement error,

and therefore to specify a range within which one

can be relatively certain the “true” score will fall.

By taking account of such measurement error, the

reliability of the test as a whole can be estimated.

The standard error of measurement (SEM),

which is reported in Table 2, is an estimate of the

amount of variation that can be expected in a test

score. A raw score of 24 on a test with an SEM of

2.85 indicates about 67 percent certainty that a per-

son’s “true” score lies in a range from 21.15 to

26.85 (24 +/- 2.85), or that we can be 95 percent

certain that the “true” score lies in a range from

18.30 to 29.70 [24 +/- (2 × 2.85)]. The smaller the

SEM, the more accurate a test is as a measure. In-

dividual test scores are best thought of as lying

within a range, rather than as a single score, be-

cause of our inability to measure knowledge per-

fectly (the SEM is never zero).

Alpha. Another estimate of overall test relia-

bility is the coefficient alpha (Cronbach, 1951). It

measures the internal consistency among test items

with a common focus, which for this test is per-

sonal finance. One way to conceptualize internal

consistency is to think of splitting the test in half

and correlating scores on both halves. The alpha

coefficient provides an estimate of the average of

all possible split half correlations.

The alpha statistic ranges from zero to 1.00.

The higher the coefficient, the better items work

together in measuring the test construct, and thus

the greater the statistical reliability of the test. An

alpha of 1.00 would indicate a perfectly reliable

test, while a coefficient of zero would indicate a

totally unreliable one. The alpha of 0.83 for the

TFK indicates that there is good internal con-

sistency among items.

Finally, it should be stressed that the reliability

of the TFK is substantially higher than that of most

teacher-made tests of personal finance. A question

to be determined by each test user is whether the

test as a whole (or individual questions) is appro-

priate for his or her students.

TABLE 5. Percentage Response to Each

Alternative: TFK

Item

60*

59*

67*

66*

73*

69*

29*

39*

34*

65*

46*

43*

36*

45*

48*

49*

40*

24*

38*

48*

32*

46*

38*

20*

62*

43*

37*

27*

40*

37*

33*

23*

46*

34*

65*

21*

30*

46*

Note: *Correct answer

Conclusion

One of the most important validity questions

for an educational achievement test such as the

TFK is whether or not it measures what ought to

be measured. The work to provide evidence of the

content validity of the TFK was described in Sec-

tions 1 and 2 of this manual. In brief, the specifi-

cation of the personal finance content that should

be included on this test was explained in the FL

Standards (CEE 2013). The eighth grade bench-

marks served as the guide for the development and

selection of test questions. The results of this work

are shown in Table 1. In addition, the item ration-

ales in the next section give an explanation for the

correct answer for each test item based on the per-

sonal finance content in the FL Standards.

The process used for test development also en-

sured that the items on the TFK would contain

valid content. Item construction was reviewed by

a National Advisory Committee (NAC) composed

of five experts in personal finance and economics.

These committee members and the two test devel-

opers evaluated the content of questions for any

potential bias or reading problems that would af-

fect the performance by different types of students.

The content of all items also was checked by NAC

members before they were included on the test.

A standardized test such as the TFK, therefore,

has much to offer the teacher. This test instrument

is carefully designed and developed to cover the

subject matter that ought to be taught (and tested)

in the upper middle and lower high school grades.

The sample data indicate that the TEK is a reliable

measure and that the test items perform well with

students at its target grade levels. Classroom tests

in personal finance made by teachers are unlikely

to attain these standards for test development. The

use of the TFK as a measure of achievement in per-

sonal finance has many advantages for middle and

high school teachers and students.

6. ITEM RATIONALE: TEST OF FINANCIAL KNOWLEDGE

ITEM

RATIONALE

1. Which is the best example of a worker with a career?

A. Ian works many different part-time jobs to save for retire-

ment.

B. Easton worked as a plumber's apprentice and now has his

own plumbing business.*

C. Skylar applies to a new job in different industries every few

years to meet new people.

D. Camila worked for a rental company for five years while

saving money to attend a four-year university.

A career encompasses more than just jobs that

earn money. A career involves a job or set of

jobs with a long-term focus, centering on a spe-

cific industry or set of skills, and often involves

advancement into new positions as experience

grows. Easton’s work experience is the only op-

tion with the long-term focus that defines a ca-

reer. [1/8/1] [Code for bracket item: Stand-

ard/Grade Level/Benchmark (CEE, 2013)]

2. An increase in which of the following will improve Avery's hu-

man capital?

A. the skills she brings to the job*

B. the time she spends looking for work

C. the number of employees where she works

D. the amount of money she has in her savings

Human capital consists of the skills and abilities

a person possesses which provide value to em-

ployers. Improvements in human capital in-

crease a worker’s productivity. None of the

other options are likely to have an effect on

Avery’s human capital. [1/8/3]

3. Which of the following people is likely earning the highest in-

come?

A. Jayden, who dropped out of high school and works as a

server at a restaurant

B. Aubrey, who graduated from high school and is an assis-

tant for an insurance agent

C. Dan, who graduated from community college with training

in auto mechanics and works as a mechanic at a car deal-

ership

D. Lily, who graduated from college with a degree in biology

and works in the quality control department at a drug com-

pany*

Workers with more education typically have

more skills and are more productive and valua-

ble to employers on the job market. Demand for

more productive workers is greater than demand

for less productive workers, and therefore more

productive workers on average earn higher in-

comes. Of the four options, Lily’s college de-

gree in biology suggests the greatest value to

employers. [1/8/4]

4. Sam works at a low-wage job. He would like a job that pays

more. What would be the best action for Sam to take to increase

his standard of living over his lifetime?

A. get more training*

B. buy more on credit

C. ask employer for a raise

D. save less to spend more

Human capital, or the skills and abilities a

worker brings to the job market, help determine

the worker’s productivity, value to employers,

and, ultimately, income over a lifetime. The

only option of the four that improves Sam’s hu-

man capital is to get more training. Buying more

on credit and saving less to spend more might

lead to temporary gains, but must eventually be

paid for. Sam’s employer will likely grant a re-

quest for a raise if Sam’s human capital in-

creases over time. [1/8/5]

ITEM

RATIONALE

5. Zoey is twelve and wants to be a veterinarian when she grows

up. She begins to save part of the income she earns from her

part-time job every week. What is the most likely reason she is

saving money?

A. to pay the veterinarian’s hospital to hire her

B. to buy the license needed to be a veterinarian

C. to buy the equipment she will need to be a veterinarian

D. to pay for the schooling she will need to be a veterinarian*

Investing in education is a requirement to have a

career as a veterinarian, as it is for a career in

many other professions. There is a cost to in-

vesting in education, and Zoey’s long-term plan

to be a veterinarian involves paying tuition.

None of the other options are valid explanations

for why she is saving income from her part-time

job to be a veterinarian. [1/8/7]

6. Nicole is an entrepreneur. One of the risks she faces is

A. disagreements with her employer.

B. failure of her business to make a profit.*

C. earning less return on her stock choices.

D. a fall in the price of equipment she uses.

Entrepreneurs start businesses with the expecta-

tion of making a profit. Since a profit is not

guaranteed, businesses can a do fail, which is a

risk entrepreneurs take. Nicole will not have an

employer, and will not necessarily be investing

in stocks in her role as an entrepreneur. Nicole

will benefit if the price she must pay for equip-

ment falls. [1/8/8]

7. Wyatt buys 100 shares of LAP stock for $10 a share. A year

later, he sells the stock for $15 a share. What is the $500 he

earned called?

A. interest

B. dividend

C. capital gain*

D. retained earnings

An investor can earn interest in different forms.

A capital gain is earned when an asset is sold for

more than the price paid when it was purchased.

This was the case for Wyatt’s investment in, and

sale of, LAP stock. Interest is earned when lend-

ing money. Dividends are paid to shareholders

in a company. Retained earnings are held by the

companies and not paid out as income to inves-

tors. [1/8/9]

8. Bill has retired and collects a payment from the government

each month. Current workers and employers pay taxes that fi-

nance these payments. What are these payments called?

A. Social Security*

B. retirement dividends

C. workers’ compensation

D. unemployment insurance

Social Security is a government program that

taxes the income of current workers to provide

retirement, disability, and survivor benefits for

workers or their dependents. Workers compen-

sation and unemployment insurance represent

two other forms of a government safety net, but

only Social Security applies to Bill’s situation.

[1/8/11]

9. Which of the following would be an example of a deceptive sales

practice for a product sold at a retail store?

A. The retail store marks down the price of the product to 50

percent off.

B. The store hires a sports star to promote the product and at-

tract new customers.

C. A store clerk directs interested customers to a store display

showing different features of the product.

D. The price stated in an advertisement for the product is

lower than the price for the product at the store.*

Although many sellers provide reliable infor-

mation regarding the sale of a product, there are

times when a seller attempts to mislead the po-

tential customer into thinking a purchase appears

better than it really is. All four options are ap-

proaches sellers might use to influence a cus-

tomer, but only stating an advertised price lower

than the actual price is deceptive. [2/8/1]

ITEM

RATIONALE

10. Which of the following gives consumers the most independent in-

formation for comparing the features and reliability of different

brands of refrigerators?

A. the sales person who sells the refrigerator at the store

B. the website of the manufacturer that makes the refrigerator

C. a comparative report on refrigerators from a consumer

testing organization*

D. advertisements about the refrigerators in newspapers, mag-

azines, or on television

Better information about a product to be pur-

chased comes from objective, or independent,

sources. Even though the refrigerator manufac-

turer’s website and advertisements might pro-

vide information, it rarely includes objective

comparisons with refrigerators of other brands.

Of the options, only the consumer testing organi-

zation provides objective, independent compara-

tive information that a potential buyer can as-

sume is unbiased. [2/8/2]

11. Adam wrote a check to Nora but the check bounced. What does

this mean?

A. Nora does not have a checking account.

B. Nora tried to cash the check at the wrong bank.

C. Adam wrote the check for less than what he owed Nora.

D. Adam did not have enough money in his checking account

to cover the check.*

When Adam uses a check, he transfers money

from his deposit account to the buyer. If there

are not enough funds in his account to cover the

check, the check will bounce. Whether or not

Adam’s check bounces is not due to Nora’s ac-

tions, nor whether or not he made the check out

to Nora for the correct amount. [2/8/3]

12. Josie goes to an auto supply store to buy new windshield wipers

that sell for $40. She knows that her checking account balance

shows $25. Can Josie pay for the wipers using her debit card?

A. Yes, because her debit card works like a credit card.

B. Yes, because she has a two day grace period to make sure

her checking account balance is $40.

C. No, because all debit cards requires a minimum $100 bal-

ance in her checking account.

D. No, because it reduces her checking account immediately

by the amount of the purchase.*

Using a debit card to pay for an item will imme-

diately – with no grace period - deduct the

amount spent from Josie’s checking account. It

is not a loan she can pay back later, which would

be the case if she used a credit card. Because

she has only $25 in her account (regardless of

any required minimum balance), $40 cannot be

deducted from it. [2/8/4]

13. The Jacksons’ budget includes fixed and variable expenses.

Which of these is a variable expense?

A. rent

B. groceries*

C. car payments

D. insurance payments

Variable expenses change from month to month,

due to changes in the amounts of the purchases

and the prices of the purchases. Fixed expenses

do not change from month to month typically

due to contracts specifying the amounts and

prices to be paid. Of the four options, only the

Jacksons’ grocery expenses vary from month to

month. [2/8/5]

ITEM

RATIONALE

14. Which of the following events would be the most likely to cause

Alexa to reduce the spending in her monthly budget?

A. She gets a promotion at work that requires more company

travel.

B. She decides to enroll in a training course paid for by her

employer.

C. She cuts back on her hours at work to take care of her el-

derly parents.*

D. She gets assigned a new position at work that reduces her

commuting time.

Over time, budgets need to be adjusted due to

changes in income or changes is spending that

are out of the person’s control. If Alexa’s in-

come falls, she must either reduce the amount

she spends or the amount she saves. Cutting

back on work hours is the only option that will

leave her with less income and thus less in her

budget to spend. [2/8/6]

15. Many people deposit money in accounts at banks and credit un-

ions. What do these institutions do with most of those deposits?

A. buy gold and silver

B. keep them in their vaults

C. lend them out to borrowers*

D. invest them in the stock market

Banks keep only a fraction of deposits in their

vaults or with the Federal Reserve. Although

banks can invest the rest of the deposits in a vari-

ety of ways, banks earn a profit primarily on the

difference between the interest they receive on

the money they loan out to borrowers and the in-

terest they pay to depositors. [3/8/1]

16. Interest is the price one pays to

A. borrow someone else’s money*

B. sell shares of a company’s stock

C. place money in a certificate of deposit

D. purchase a corporate or government bond

Interest is the amount, or price, a borrower pays

to a lender for using money. [3/8/2]

17. Which of the following is most likely to cause a bank to increase

the interest rate it pays on deposits in savings accounts?

A. a decrease in the number of competing banks

B. a decrease in the interest rates other banks are charging

for loans

C. an increase in the number of people who want to take out

loans*

D. an increase in the number of people who want to open sav-

ings accounts

The interest rate a bank pays depositors and the

interest rate it charges borrowers are determined

by market forces. When more people want to

take out loans, demand for loans increases. This

increases the demand from banks for deposits,

increasing the price they pay for deposits, or the

interest rate. All of the other options are exam-

ples of market forces which would likely lead a

bank to decrease the interest rate it pays on de-

posits. [3/8/3]

18. When interest rates increase,

A. savers earn less interest and borrowers pay less interest.

B. savers earn less interest, but borrowers pay more interest.

C. savers earn more interest, but borrowers pay less interest.

D. savers earn more interest and borrowers pay more inter-

est.*

The interest rate determines the amount a bor-

rower pays a lender for the use of money. As the

interest rate increases, more interest must be paid

from the borrower to the lender. [3/8/4]

ITEM

RATIONALE

19. Suppose Amanda deposited $100 in a savings account at the be-

ginning of the year. Her deposit is known as her

A. profit.

B. principal.*

C. capital gains.

D. interest income.

Principal is the initial amount of money upon

which interest is paid to a depositor, in this case

Amanda. Profit is revenue minus costs. A capi-

tal gain is earned if a financial asset is sold for

more than the amount the investor paid for it.

Interest income is earned by lenders for the use

of their money. [3/8/5]

20. Interest that is left in an account for a period of time also earns

interest. What is this called?

A. double profit

B. extra principal

C. special interest

D. compound interest*

A person earns interest on all of the money in an

account, not just the amount deposited. If, for

example, $100 is deposited and earns $2 in inter-

est in one period, interest will be earned on $102

the next period. This is called compound inter-

est and allows money to grow much more than

just $2 every period if the money is left in the

account for a long time. [3/8/6]

21. Mike and Katlyn both deposited $500,000 into their savings over

their lifetimes for retirement. Mike began saving 10 years before

Katlyn, and retired with more savings than Katlyn. Which of the

following is the best explanation for why Mike retired with more

savings?

A. People who start saving earlier allow compound interest to

work longer on their savings.*

B. People who start saving earlier likely earn higher salaries

than the people who wait to save.

C. People who start saving earlier are paid higher interest

rates than those who wait to start saving.

D. People who start saving earlier are less likely to lose any of

their savings than those who wait to save.

Compound interest is interest earned on the

amount deposited and previously earned interest.

Because Mike began saving before Katlyn, the

interest earned in each of the 10 years before

Katlyn began saving allowed Mike’s savings to

grow much more than Katlyn’s savings. None

of the other options are valid reasons explaining

why Mike retired with more savings. [3/8/7]

22. Javier has $25,000 in his checking account at Stormy Ridge

Bank. Stormy Ridge Bank is a member of the FDIC. If Stormy

Ridge Bank fails, Javier will lose

A. $0.*

B. $6,250.

C. $10,000.

D. $25,000.

FDIC stands for the Federal Deposit Insurance

Corporation, which insures deposits at member

institutions up to a limit of $250,000 as of 2015.

None of Javier’s $25,000 in his checking ac-

count will not be lost if Stormy Ridge fails since

the bank is a member of the FDIC. [3/8/9]

23. The total interest Vicki will pay for borrowing $1,000 will be

lower

A. the longer the loan term and the lower the interest rate.

B. the longer the loan term and the higher the interest rate.

C. the shorter the loan term and the lower the interest rate.*

D. the shorter the loan term and the higher the interest rate.

Interest accumulates every period of the term of

a loan, so the shorter the term of the loan, the

less periods interest must be paid. Also, the

lower is the interest rate, the less is the interest

calculated each period. [4/8/2]

ITEM

RATIONALE

24. Which of the following lets someone buy a good or service now

but pay for it later?

A. a debit card

B. a credit card*

C. a money order

D. a personal check

When someone uses a credit card, a loan is cre-

ated from the financial institution that issued the

card. The loan can be used to purchase a good

or service now, and be paid back to the financial

institution later. Both a debit card and a personal

check must be paid for by the purchaser at the

time of the purchase. A money order must be

paid for before the purchase of the good or ser-

vice. [4/8/3]

25. Who is likely to pay the greatest dollar amount in finance

charges, if each has charged the same amount on credit cards

that have the same interest rate?

A. someone who pays the minimum payment each month*

B. someone who pays half the balance on his card each month

C. someone who pays off the credit card bill in full each month

D. someone who pays the minimum amount one month, and

then the full balance the next

Finance charges include interest that must be

paid on unpaid balances on credit cards. The

larger the unpaid balance, the larger is the inter-

est owed. Of the four options, a credit card user

who pays only the minimum balance will have

the largest unpaid balance and thus the largest fi-

nance charge. [4/8/4]

26. In general, which of the following financial businesses will

charge the highest interest rate for a short term loan?

A. credit union

B. savings and loan

C. commercial bank

D. payday loan shop*

Different financial institutions offer short-term

loans and charge different rates of interest. Of

the four options, payday loan shops are typically

used by borrowers who cannot qualify for loans

at other financial institutions and are able to

charge the higher interest rates. [4/8/5]

27. What loan is used to buy a home?

A. payday

B. consumer

C. mortgage*

D. home equity

Mortgages are secured long-term loans used to

buy homes or property, and the home or property

provides the collateral. Home equity loans also

use the home as collateral but are used for pur-

poses other than purchasing homes or property.

Consumer loans are used to purchase consumer

goods and services other than homes and prop-

erty, and payday loans are short-term loans of

much smaller amounts than that used to purchase

homes or property. [4/8/6]

28. What will a lender do if someone who has a higher than average

risk of nonpayment wants to borrow money?

A. charge a lower interest rate

B. charge a higher interest rate*

C. reduce the person’s credit score

D. raise the person’s credit score

Both the interest rate and the risk of default de-

termine the rate of return a lender expects to re-

ceive on a loan. If the risk of default is greater

for a certain potential borrower than others the

lender could make the loan to, the lender will

charge the riskier borrower a higher, not lower,

interest rate to receive the same rate of return.

The lender will not affect the borrower’s credit

score when making the loan. [4/8/7]

ITEM

RATIONALE

29. Jason purchases a corporate bond. His investment is

A. a loan to a corporation that will be paid back with inter-

est.*

B. a certificate of deposit with a corporation that guarantees a

rate of return.

C. a group of diverse assets that are professionally managed

by a corporation.

D. ownership in a corporation for which he will receive a por-

tion of the profits.

Jason’s investment in a corporate bond amounts

to purchasing a loan the corporation must pay in-

terest on and eventually pay back. Although a

certificate of deposit is a loan to a bank, it is not

considered a bond. A group of diverse assets

that are professionally managed is a mutual fund,

and ownership in a corporation for which a por-

tion of profits is received defines a share of

stock. [5/8/1]

30. Drew put $12,000 in a new savings account and made no

changes to the account for a month. At the end of the month he

had $12,010 in the account. What was his annual interest rate?

A. 0.01 percent

B. 1 percent*

C. 10 percent

D. 100 percent

The amount of interest Drew’s account paid dur-

ing the month was $10 on $12,000, or 1/1,200.

To calculate the annual rate, this monthly rate is

multiplied by 12 months, which equals 0.01 or 1

percent. [5/8/2]

31. Amy received a dividend from Company X. This means she

A. sold the stock for more than she paid for it.

B. was paid a portion of the company's profits.*

C. earned an additional one percent interest rate from the

company.

D. received interest income on the money she loaned to the

company.

To receive a dividend from Company X, Amy

must own stock in the company. A stockholder

can earn income in the form of dividends, which

are profits distributed by the company to stock-

holders, or by selling shares of the stock for

more than what the seller paid for the stock. In-

terest income can be earned by owning Com-

pany X’s bonds, not stock. [5/8/3]

32. The price of Corporation XYZ’s stock will most likely rise if

A. tax rates in the United States increase.

B. investors expect the company's profits to increase.*

C. the public expects the company's profits to decrease.

D. government regulation over XYZ’s industry increases.

The price of a share of stock in Corporation

XYZ is determined by the market for XYZ’s

stock. If investors expect XYZ’s profits to rise,

they will want to purchase more of XYZ’s stock

in hopes of a higher future value, which in-

creases demand and the current share price. All

other options will cause a downward pressure on

XYZ’s stock price. [5/8/4]

33. Ryan wants to put the $5,000 he earned from his summer job in a

safe financial asset as part of his savings for college. Which of

the following financial investments is considered to have the low-

est risk of losing value?

A. a mutual fund

B. corporate bond

C. a certificate of deposit (CD)*

D. stock from a single corporation

Ryan has a variety of financial assets from which

to choose when saving for college. If he values

a low risk of losing money, he will choose a fi-

nancial asset with the least amount of variation

in the possible rate of return. The only possibil-

ity of lost funds in a CD is if the financial insti-

tution offering the CD fails and is not an FDIC

member. Mutual funds, corporate bonds and

shares of stock all have much greater variations

in rates of returns than CDs, and are much more

likely than CDS to lose value. [5/8/6]

ITEM

RATIONALE

34. Melissa and Josh are both investors, but they invest in different

financial assets. Melissa invests in stocks. Josh invests in sav-

ings bonds. Compared with Melissa's investments, Josh invests

in financial assets with

A. lower risk and higher expected rates of return.

B. lower risk and lower expected rates of return.*

C. higher risk and a higher expected rates of return.

D. higher risk and lower expected rates of return.

Savings bonds pay a fixed amount of interest to

bondholders and are considered one of the safest

financial assets because they are issued by the

U.S. government, which is very unlikely to de-

fault. The rate of return on stocks is much more

variable and thus much riskier than savings

bonds. Because there is a positive relationship

between the amount of risk and the expected rate

of return, Josh’s lower-risk investment in sav-

ings bonds is accompanied by a lower expected

rate of return than Melissa’s investment in

stocks. [5/8/7]

35. Julia is one of the best piano players in the world. Her parents

pay an annual fee to a company that promises to pay Julia $10

million if she accidentally injured her fingers and couldn't play

the piano. What type of arrangement is this?

A. loan

B. equity

C. liability

D. insurance*

Insurance is a financial product that someone

purchases to pay for future loses usually associ-

ated with risk. Insurance transfers risk from the

buyer to the seller. Julia’s parents pay an annual

fee, or premium, to a company to transfer the

risk of lost future income due to the possibility

of injury, so the arrangement is considered insur-

ance. Loans, equity and liability are all financial

concepts, but none alone are insurance arrange-

ments. [6/8/2]

36. What does an auto insurance company consider when deciding

how large a premium to charge a policyholder?

A. the annual income of the customer based on tax returns

B. the potential number of passengers who will ride in the car

C. the potential cost of car repairs if the customer has an acci-

dent*

D. the amount of money the customer has in savings and in-

vestments

An insurance company will charge a higher pre-

mium to customers that create a higher expected

cost. The cost of insuring a driver is determined

by the risk of the driver getting into an accident

and the potential cost of repairs of an accident.

The other options do not signal to the insurance

company the expected cost of insuring a driver.

[6/8/3]

37. Eron decides to drop the insurance coverage on her cell phone.

From an insurance perspective she has decided to accept the

A. risk.*

B. reward.

C. security.

D. premium.

Eron would continue paying for insurance if she

preferred the certainty of the small insurance

coverage costs over the risk of the larger poten-

tial cost of replacing or fixing her cell phone.

By dropping her insurance coverage she has ac-

cepted the risk of future loss. [6/8/4]

ITEM

RATIONALE

38. Sophia has an auto insurance policy with the following deducti-

bles: (1) $1,000 for collision; (2) $500 for comprehensive; and

(3) $0 for property damage. If she backs into a mailbox and

causes $200 in damage to the mailbox, how much of the repair

cost would be Sophia's responsibility?

A. $0*

B. $200

C. $500

D. $1,000

The $200 damage to the mailbox is covered un-

der property damage since the mailbox is some-

one else’s property. A deductible is the amount

Sophia must pay before the auto insurance com-

pany covers the remaining cost. A $0 deductible

for property damage means that the entire $200

cost of repairing the mailbox will be paid by the

insurance company. [6/8/5]

39. The premium for insurance will be higher if the

A. dividend is low.

B. deductible is low.*

C. probability of loss is low.

D. size of potential loss is low.

A deductible is the amount the insured must pay

for a loss before the insurance company covers

the remainder of the loss. A lower deductible is

associated with a higher expected cost for the in-

surance company, and the insurance company

will therefore charge a higher premium for a pol-

icy with a lower deductible. Dividends are not

associated with insurance premiums. A lower

probability of loss or size of loss will lead to a

lower, not higher, premium. [6/8/5]

40. Two 18-year-old boys, Ethan and Caleb, have identical cars.

Ethan has higher auto insurance premiums than Caleb. What is

the most likely reason?

A. Ethan was fired from his job.

B. Ethan does not plan to attend college.

C. Ethan does not have a savings account.

D. Ethan was responsible for an auto accident.*

An insurance company will charge a higher pre-

mium to customers that are a greater risk of get-

ting into an accident. A history of past accidents

is a signal to insurance companies of the poten-

tial for future accidents. Because Ethan had an

accident, he is considered riskier than Caleb and

is charged a higher premium. None of the other

options affect the premiums auto insurance com-

panies charge drivers. [6/8/6]

7. REFERENCES

Cronbach, L.J. (1951). Coefficient alpha and the internal structure of tests. Psychometrica, 16, 297-

334.

Council for Economic Education (CEE). (2010). Voluntary National Content Standards in Economics.

New York: Council for Economic Education.

Council for Economic Education (CEE). (2013). National Standards in Financial Literacy. New York:

Council for Economic Education.

Walstad, W.B. and Rebeck, K. (2005). Financial Fitness for Life: Middle School Test Examiner’s

Manual (Grades 6-8). New York: Council for Economic Education.

Walstad, W.B., & Rebeck, K. (2010). Basic Economic Test: Examiner’s Manual (3rd ed.). New York:

Council for Economic Education

Walstad, W.B., & Rebeck, K. (2010). Test of Economic Knowledge: Examiner’s Manual (2nd ed.).

New York: Council for Economic Education

Walstad, W.B., & Rebeck, K. (2013). Test of Economic Literacy: Examiner’s Manual (4th ed.). New

York: Council for Economic Education

Walstad, W.B., K. Rebeck, and R. MacDonald (2010). “The Effect of Financial Education on the Finan-

cial Knowledge of High School Students.” Journal of Consumer Affairs. 44:2 (pp. 317-335)

Appendix 1. Personnel for the TFK Development

Project Director

William B. Walstad, University of Nebraska-Lincoln

Associate Project Director

Ken Rebeck, St. Cloud State University (Minnesota)

Council Officer

Kevin Gotchet, Council for Economic Education (New York)

National Advisory Committee

William Bosshardt, Florida Atlantic University

Elizabeth Breitbach, University of South Carolina

Brenda Cude, University of Georgia

Andrew Hill, Federal Reserve Bank of Philadelphia

Bonnie Meszaros, University of Delaware

Appendix 2. Schools Participating in TFK Testing

ARKANSAS

Hazen Elementary School

Hazen 72064

ILLINOIS

Areil Elementary Community Academy

Chicago 60653

St. Alphonsus/St. Patrick School

Lemont 60439

KANSAS

Osawatomie Middle School

Osawatomie 66064

MASSACHUSETS

Quincy Upper School

Boston 02116

NEVADA

John C Fremont Middle School

Las Vegas 89104

Appendix 3. Answer Form and Scoring Key, TFK

Answer Form

A B C D

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________ ________

RAW SCORE PERCENTILE

SCORE

NAME ____________________________________________________ DATE __________________________

month day year

AGE __________ DATE OF BIRTH _____________________________ GENDER Male Female

month day year (circle one)

SCHOOL OR TEST CENTER __________________________________________________________________

ADDRESS _________________________________________________________________________________

number and street city state zip

INSTRUCTOR ______________________________________ GRADE OR YEAR ______ SEMESTER ______

Appendix 3. Answer Form and Scoring Key, TFK (Continued)

Scoring Key

A B C D

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