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SEMESTER ECONOMICS Competency PreTest NAME _____________________ EPF 7 - The student will demonstrate knowledge of how monetary and fiscal policy influence employment, output, and prices 1. A phrase we frequently hear in the news is “The Federal Reserve Bank” but what is “The Fed” and what do they do for us? Essentially, “The Fed” is the nation’s central bank. The Federal Reserve System’s responsibilities include conducting monetary policy; supervising and regulating financial institutions; and providing services to depository institutions, the federal government, and the public. Twelve regional Federal Reserve Banks and their branch offices carry out the day-to-day responsibilities of the Federal Reserve System. The Board of Governors of the Federal Reserve System, whose members are appointed by the President of the United States and confirmed by the U.S. Senate, provides leadership for the Federal Reserve System. The Federal Open Market Committee (FOMC) is responsible for making monetary policy decisions. The FOMC is composed of members of the Board of Governors and presidents of the twelve Federal Reserve Banks. The goal of the Federal Reserve System is to help the economy achieve stable prices, full employment, and economic growth. With that said, match the following terms with their definitions. Use “?” if you don’t know. A. B. C. D. E. F. G. H. I. J. Monetary Policy Government Securities Discount Rate Soundness Compliance Board of Governors Federal Open Market Committee Depository Institutions Reserve Requirements Fiscal Policy (Continued on next page) _____ the action or fact of complying with a wish or command. _____ the branch of the Federal Reserve Board that determines the direction of monetary policy. _____ a bond (an instrument of indebtedness of the bond issuer to the holders) issued by a government authority with a promise of repayment upon maturity. Government securities such as savings bonds, treasury bills and notes also promise periodic interest payments. These bonds are considered lowrisk, since they are backed by the taxing power of the government _____ the process by which a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency. _____ what is said to describe a financial institution (bank) as financially strong, secure, or reliable _____ sets the minimum fraction of customer deposits and notes that each commercial bank must hold in the bank (rather than lend out) _____ another name for a bank _____ the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy _____ the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement monetary policy _____ the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank 2. Fiscal Policy is used to help the economy to expand or contract depending upon (in the opinion of the Fed’s Board of Governors) what is going on in the economy. For the fiscal actions listed, indicate with an “EX” if you think it will cause the economy to expand, a “Con” is you think the action will cause the economy to contract, or a “?” if you don’t know. A. B. C. D. 3. The same is true for Monetary Policy; it’s used to encourage the economy to expand or contract depending upon (in the opinion of the Fed’s Board of Governors) what is going on in the economy. For the monetary actions listed below, indicate with an “EX” if you think it will cause the economy to expand, a “Con” is you think the action will cause the economy to contract, or a “?” if you don’t know. A. B. C. D. E. F. 4. _______ Tax cuts _______ Tax increases _______ Increased government spending _______ Decreased government spending _______ decreases in the discount rate _______ increases in the discount rate _______ purchases of government securities from banks _______ Sales of government securities to banks _______ increases in the reserve ratio _______ decreases in the reserve ratio The Federal Reserve System provides other services including supplying paper money and coin to banks, processing checks and electronic payments, and protecting consumers through regulation and education. As a matter of fact, some of the materials that we’ll be using in class are provided by the Federal Reserve. However, there is another organization, the Federal Deposit Insurance Corporation (FDIC) that offers consumer insurance for their bank deposits. When was the FDIC created and why? _____________________________________________________________________________________ _ _____________________________________________________________________________________ _ 5. Ultimately, the Federal Reserve Bank has regulatory authority over the banks in the United States. Per the United States Code: Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, . . . The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time. What does knowing that banks in this country are being watched by the federal government do for consumers? _____________________________________________________________________________________ ___ 6. _____________________________________________________________________________________ ___ The main sources of government income are income taxes, sales and property taxes and fees. State, county and local governments also receive grant money from the federal government. If all goes well, the nation’s budget will be balanced. That, however, rarely happens. With that in mind, define the following terms Balanced Budget __________________________________________________________________ __________________________________________________________________ Budget Deficit __________________________________________________________________ __________________________________________________________________ National Debt __________________________________________________________________ __________________________________________________________________