Module 4 Glossary Term Board of Governors of the Fed Business Cycle Consumers Contraction in the business cycle Contractionary Fiscal Policy Contractionary monetary policy Deficit Discount Rate Entrepreneurism and the GNP Equilibrium Expansion in the business cycle Expansionary Fiscal Policy Expansionary monetary policy Federal Debt Federal Open Market Committee (FOMC) Federal Reserve Federal Reserve - Sections or Departments Definition Analyzes economic data, supervises Federal Reserve Banks. Administers financial regulations Participates in Federal Open Market Committee Communicates with leaders in other parts of government. Repeating expansions and contractions of the economy - resembles a roller coaster. Four phases of the business cycle include expansion, peak, contraction, and the trough. Each full cycle of the phases typically lasts between three to five years. Person or group who demands goods and services. A period of decreasing economic activity, similar to the downhill part of a roller-coaster ride. During a contraction, unemployment rises while inflation falls. Includes actions of congress to help slow down the economy. May decrease spending or increase taxes. Includes actions of the Fed that contract, or decrease the money supply. Economists associate decreasing the money supply with slowing down economic growth and fighting inflation. This may include raising the discount rate, raising the reserve requirement, and selling of government securities in open market operations. Measurement of expenses that exceed income. The interest rate the Federal Reserve charges banks to borrow currency. Decreasing DR=member banks borrow more $$=banks loan more $$ to people. Increasing DR=member banks borrow less $$=less loans available to people. All the inventions associated with computers and other technological developments, have fueled a huge expansion in the GNP. Price and quantity where supply and demand meet. Part of the business cycle like the upward climb of the roller coaster. During the expansion phase, Gross Domestic Product, or GDP, is increasing. Usually, this also means that the rate of inflation is increasing while the unemployment rate is decreasing. Includes actions of congress to help economic growth. May increase spending or decrease taxes. Includes actions of the Fed that expand, or increase the money supply. Economists associate increasing the money supply with quickening the pace of economic growth and fighting recession. This may include decreasing the reserve requirement, decreasing the discount rate, and buying bonds in open market operations. The total amount the government owes to purchasers of government securities, like Treasury bonds. An accumulation of deficits. Discusses economic outlook and potential adjustments to the money supply. Consists of Board of Governors, President of the New York Reserve Bank, and four other Reserve Bank Presidents on a rotating basis. Nicknamed the Fed, is the central bank of the United States. Controls monetary policy. There are many sections composed of people all working toward the same goal positive economic growth. Board of Governors, Federal Open Market Committee (FOMC), Federal Reserve Banks, Member Banks, Other Depository Institutions. 1
Federal Reserve Banks Fiscal Policy Gross National Product Inflation rate Member Banks of the Federal Reserve Minimum Wage Monetary Policy Money Supply Natural Monopolies Natural Resources and the GNP Open Market Operations Other Depository Institutions (NOT part of the Fed) Peak in the business cycle Population and the GNP Price Control Price Stability Regulation Regulatory Laws Reserve Requirement Shortage Stagflation Subsidies Provides service to banks and the U.S. Treasury the bankers bank. Supervises bank operations within their region Handles check collection, electronic funds transfer, distribution of currency and coin to banks. Comprised of 12 Federal Reserve Banks, each serving its own region of the United States. Government use of taxing and spending to meet economic goals. The government utilizes fiscal policy to promote the economic goals of full employment, price stability, and economic growth. The sum of the production of goods and the supply of services in a given country. GNP can be effected by population, entrepreneurism, trade, war, and natural resources. The general rise of prices over time. Best measure of price stability. Receive services from regional Federal Reserve Bank, The lowest amount a business can pay for the work of an employee, set by the government. Federal Reserve actions that monitor and control the U.S. money supply to meet economic goals. The tools of monetary policy include: The discount rate, reserve requirement, and open market operations. The Federal Reserve utilizes monetary policy to promote the economic goals of full employment, price stability, and economic growth. The total amount of money available in the national economy. Product produced most efficiently when there is one supplier. Examples: police, sewer systems, highways. The discovery of oil is a classic case of natural resources driving up the GNP of a region such as the Middle-East. Similarly, in rain forests around the world, harvesting trees has had a positive impact on the GNP. The Federal Reserve s frequent buying and selling of government securities (bonds), considered the most significant of the three tools. Buy bonds= FED gives banks $$ for bonds=banks loan more $$ to people. Sell bonds=fed gets $$ from banks=less loans available to people by bank. Not technically not part of the Federal Reserve System, yet subject to regulations. Includes credit unions, savings and loan associations, commercial banks, and savings banks. Receive services from regional Federal Reserve Bank. The momentary pause at the summit is the peak, where production reaches the highest current level. This is a time when the inflation rate is at it s highest and unemployment is at the lowest. Population growth can increase both GNP and per capita GNP. Government intervention in markets in which legal restrictions are placed on the prices charged. Little fluctuation in the price level for goods and service. The inflation rate is the best indicator of price stability. Government laws that control businesses. Laws set by a government that control aspects of how a firm conducts business. The percentage of a bank s deposits that must be kept as currency and coin in the bank. Decreasing RR= banks keep less $$ in vault=banks loan more $$ to people. Increasing RR=banks keep more $$ in vault=less loans available to people. Lack of product due to demand exceeding supply. A period of high unemployment and inflation. Financial assistance payments by the government. 2
Surplus Trade and the GNP Trough in the business cycle Unemployment rate War and the GNP Excess product due to supply exceeding demand. Global trading increases GNP. The lowest point of the roller coaster ride and of the business cycle. The trough is the transition from a contraction to an expansion phase and thus the worst point in a period of decline. Reflects the percentage of people over age 16 who are trying but unable to find work. For countries like the U.S. and much of Western Europe, which today supply military arms, war can have a positive effect on the GNP. 3
Help Sheet for use with the Practice Test: Fiscal v. Monetary Policies Fiscal Policy Who: Congress What: Taxing Spending Monetary Policy Who: The Federal Reserve What: Discount Rate Reserve Requirement Open Market Operations Contractionary v. Expansionary Policies Contractionary Policies Shrink/slow the economy Fiscal: raise taxes Cut spending Monetary: Raise the Discount Rate Raise the Reserve Requirement Fed Sells Government Securities Expansionary Policies Grow/expand the economy Fiscal: lower taxes Increase spending Monetary: Lower the Discount Rate Lower the Reserve Requirement Fed Buys Government Securities The Federal Reserve 4
Module Four Economics Practice Exam 1. An example of fiscal policy is a. the Federal Reserve increasing the discount rate. b. the Federal Reserve conducting open market operations. c. Congress approving an increase in the income tax. d. Congress approving an increase in the discount rate 2. Increasing taxes would be appropriate to a. slow the inflation rate. b. speed up the inflation rate. c. create deflation. d. create stagflation. 3. To promote economic growth, countries would most likely act so that inflation a. is eliminated. b. remains at a high level. c. remains at a low level. d. is a negative number. 4. Increasing government spending usually a. increases the unemployment rate. b. decreases the unemployment rate. c. increases the stagflation rate. d. decreases the stagflation rate. 5. You are a member of Congress and your aide reports that unemployment continues to rise. You are due to report to the floor to vote on several bills. To address unemployment, you vote for the proposed bill that aims to a. increase spending on grants for small businesses. b. increase taxes on large corporations. c. regulate unemployment offices. d. regulate cell phone towers. 5
Use the Graph to answer numbers 6 through 9. 6. When the economy is operating at point B, the U.S. Congress is most likely to follow a. expansionary fiscal policy. b. contractionary fiscal policy. c. expansionary monetary policy. d. contractionary monetary policy. 7. When the economy is operating at point B, the Federal Reserve may increase the discount rate to a. decrease inflation. b. increase inflation. c. decrease growth. d. increase growth. 8. When the economy is operating at point C, the Federal Reserve is most likely to follow a. expansionary fiscal policy. b. contractionary fiscal policy. c. expansionary monetary policy. d. contractionary monetary policy 9. In the business cycle phase marked D, economists expect the a. inflation rate to begin dropping. b. unemployment rate to start falling. c. consumer sales rate to decrease. d. banks to seek government aid. 6
10. Which of the following is not a tool of monetary policy? a. tax law b. discount rate c. reserve requirement d. open market operations 11. Reducing the discount rate is an example of a. expansionary fiscal policy. b. contractionary fiscal policy. c. expansionary monetary policy. d. contractionary monetary policy. 12. In the diagram above, what will happen if the government sets the price for Internet access at Point A? a. The price of Internet access will rise to meet equilibrium. b. The price of Internet access will fall to meet equilibrium. c. There will be a shortage of Internet access. d. There will be a surplus of Internet access. 13. An example of a natural monopoly product is a. a hair salon. b. a board game. c. airplane manufacturing. d. highway construction. 7
14. You are a member of Congress discussing the minimum wage. Unemployment is rising out of control and applications for government assistance are at an all-time high. The public demands immediate action. To address their concerns, you should recommend a. postponing the issue to see if conditions improve without intervention. b. keeping the minimum wage at its current level. c. lowering the minimum wage. d. raising the minimum wage. 15. One benefit of regulating a natural monopoly is that a. consumers have many choices. b. competition between products improves quality. c. consumers do not have to research different companies. d. the government ensures the supplier works safely and efficiently. 16. Which product would be most beneficial for government to regulate? a. sidewalk construction b. playground construction c. furniture restoration d. antique dealers 17. The city council asks you to analyze several product markets for natural monopoly qualities. The council wishes to regulate one of the products to provide safer, more efficient, and standard quality to its residents. Which product do you recommend? a. health and beauty spas b. roof installation and repair c. wireless internet service d. tree cutting services 8
18. The accumulation of years of spending more money than is collected in revenues over several years creates a budget a. debt. b. deficit. c. surplus. d. reversal. 19. Which plan would most quickly correct a budget deficit worth 15% of total spending? a. increase spending on employment programs by 10% b. reduce spending on all government programs by 5% c. reduce the four largest spending categories by 20% d. increase income taxes for all Americans by 5% 20. Banks that are members of the Federal Reserve have the benefit of a. earning dividends from stock in the Federal Reserve. b. voting rights on the Federal Open Market Committee. c. appointment rights to the Board of Governors. d. priority access to check-clearing services. 21. The Federal Reserve's Board of Governors is responsible for a. appointing members of the Federal Open Market Committee. b. personally supervising the minting of new U.S. currency. c. authorizing check clearing services for member banks. d. communication with other government leaders. 22. The part of the Federal Reserve with the most impact on the money supply is the a. Federal Open Market Committee. b. Federal Reserve Regional Bank. c. Board of Governors. d. Member Banks 9
23. If Bank of America needed to borrow money, the bank manager would contact the a. Federal Open Market Committee. b. Federal Reserve Regional Bank. c. Board of Governors. d. Member Bank. 24. Inflation is low and unemployment is high. The public is demanding action. Within the Federal Reserve, who has the power to act? a. President of the Federal Reserve Bank of New York b. Supreme Governor of the Board of Governors c. Leader of the National Consumers Union d. Federal Open Market Committee 25. You have an account with Wells Fargo. You cashed a check from your job on payday and requested newly minted currency. What Federal Reserve structure provides new currency to your bank? a. Federal Open Market Committee b. Federal Reserve Regional Bank c. Board of Governors d. Member Bank Answers are on the next page. 10
1. C Congress controls Fiscal Policy. It is the use of taxing and spending to meet economic goals. 2. A Increasing taxes is an example of contractionary fiscal policy. It will slow consumer spending and therefore slow the inflation rate. 3. C A low rate of inflation shows economic growth in the economy. 4. B by increasing spending, the idea is that jobs will be created throughout the economy 5. A by increasing grants for small businesses, those businesses will have access to more money to hire more workers and reduce unemployment 6. B Congress is in control of fiscal policy. At point B, there is high inflation and they will want to create a contraction to slow inflation 7. A At point B, they will want to decrease inflation 8. C at point C, the economy is in the trough and they will want to create expansionary policy. The Federal Reserve is in charge of monetary policy. Therefore, they need to enact expansionary monetary policy. 9. B at that point the economy is starting its expansion and the unemployment rate is decreasing as businesses start to do better and consumer spending increases 10. A tax law is a part of fiscal policy 11. C the discount rate is the interest rates that The Fed charges banks to borrow money. By lowering the rate, banks are more likely to borrow money and pass that lower interest rate along to their customers. This will increase consumer borrowing and help to expand the economy. 12. D whenever price is set above equilibrium, it will cause a surplus of the product or service 13. D natural monopolies are products/services that can be supplied more safely and efficiently by one producer. In this case, highway construction is the best choice because we want it to always be uniform and safe for the users of the highways. 14. C by lowering minimum wage, employers will be able to hire more workers and unemployment rates will decrease 15. D for natural monopolies, we want the service or product to be uniform, safe, and efficient. For example, electric or water services. 16. A we want these to always be the same and to be safe for the users 17. C we want our internet service to always be the same, fast, and efficient the other products would benefit from competition because they can differentiate 18. A debt is the accumulation of overspending 19. C by decreasing the four largest categories by 20%, it will have the biggest impact on the overall economy. Think back to the biggest categories in the budget lesson of 4.05 20. A member banks earn dividends 21. D the Board of Governors are the middlemen between The Federal Reserve and government leaders 22. A the Federal Open Market committee is in charge of Open Market Operations which are used daily 23. B the Federal Reserve Regional bank oversees the member banks in their area/region 24. D the Federal Open Market committee can buy securities to help create an expansion 25. B the Federal Reserve Regional bank would provide new currency to its member banks 11