Module 4 Glossary
Term
Board of Governors of
the Fed
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.
Business Cycle
Consumers
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.
Contraction in the
business cycle
A period of decreasing economic activity, similar to the downhill part of a roller-coaster ride.
During a contraction, unemployment rises while inflation falls.
Contractionary Fiscal
Policy
Includes actions of congress to help slow down the economy. May decrease spending or
increase taxes.
Discount Rate
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.
Entrepreneurism and
the GNP
Equilibrium
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.
Expansion in the
business cycle
Expansionary Fiscal
Policy
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.
Expansionary
monetary policy
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.
Federal Debt
The total amount the government owes to purchasers of government securities, like
Treasury bonds. An accumulation of deficits.
Contractionary
monetary policy
Deficit
Federal Reserve
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.
Federal Reserve Sections or
Departments
Board of Governors, Federal Open Market Committee (FOMC), Federal Reserve Banks,
Member Banks, Other Depository Institutions.
Federal Open Market
Committee (FOMC)
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Fiscal Policy
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.
Gross National Product
Inflation rate
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.
Member Banks of the
Federal Reserve
Minimum Wage
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 Banks
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
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.
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Surplus
Trade and the GNP
Trough in the business
cycle
Unemployment rate
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.
War and the GNP
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.
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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…
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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.
c. create deflation.
b. speed up the inflation rate.
d. create stagflation.
3. To promote economic growth, countries would most likely act so that inflation
a. is eliminated.
c. remains at a low level.
b. remains at a high level.
d. is a negative number.
4. Increasing government spending usually
a. increases the unemployment rate.
c. increases the stagflation rate.
b. decreases the unemployment 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.
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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.
c. expansionary monetary policy.
b. contractionary fiscal 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.
c. decrease growth.
b. increase inflation.
d. increase growth.
8. When the economy is operating at point C, the Federal Reserve is most likely to follow
a. expansionary fiscal policy.
c. expansionary monetary policy.
b. contractionary fiscal policy.
d. contractionary monetary policy
9. In the business cycle phase marked D, economists expect the
a. inflation rate to begin dropping.
c. consumer sales rate to decrease.
b. unemployment rate to start falling.
d. banks to seek government aid.
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10. Which of the following is not a tool of monetary policy?
a. tax law
c. reserve requirement
b. discount rate
d. open market operations
11. Reducing the discount rate is an example of
a. expansionary fiscal policy.
c. expansionary monetary policy.
b. contractionary fiscal 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.
c. airplane manufacturing.
b. a board game.
d. highway construction.
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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
c. furniture restoration
b. playground construction
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
c. wireless internet service
b. roof installation and repair
d. tree cutting services
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18. The accumulation of years of spending more money than is collected in revenues over several years
creates a budget
a. debt.
c. surplus.
b. deficit.
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.
c. Board of Governors.
b. Federal Reserve Regional Bank.
d. Member Banks
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23. If Bank of America® needed to borrow money, the bank manager would contact the
a. Federal Open Market Committee.
c. Board of Governors.
b. Federal Reserve Regional Bank.
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. 
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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
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