International Baccalaureate (IB) Practice Exam

Which of the following best describes a zero-based budget?

1. A budget where every dollar is allocated to a specific purpose.

2. A budget that ignores savings and investments.

3. A budget based only on monthly income.

4. A budget that is flexible with spending.

The correct answer is: A budget where every dollar is allocated to a specific purpose.

A zero-based budget is best described as a budget where every dollar is allocated to a specific purpose. This budgeting method requires individuals to assign every income dollar to expenses, savings, or debt repayment, effectively ensuring that income minus expenditures equals zero by the end of the budgeting period. This approach encourages careful tracking and prioritization of spending, as it necessitates that all funds are purposefully assigned, leading to a greater awareness of financial priorities. The other options do not accurately capture the essence of a zero-based budget. For instance, a zero-based budget can and should include savings and investments, contrary to the suggestion in one option that it ignores them. Furthermore, while a zero-based budget is built around total income, it does not solely limit itself to monthly income, as it can include other financial inflows throughout the budgeting period. Full flexibility with spending is also not characteristic of a zero-based budget, as its core principle is dedicated, deliberate allocation rather than arbitrary spending adjustments.