04.07 Module Four Exam

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The Federal Open Market Committee promotes price stability and economic growth through

management of the money supply

How does the U.S. government promote economic growth?

By decreasing taxes and increasing spending

Banks that are members of the Federal Reserve have the benefit of

earning dividends from stock in the Federal Reserve

When a government collects more revenue in one year than it spends, there is a budge


How does the president most directly influence the Federal Reserve System?

Through appointments to the Board of Governors

Look at the graph. Does zone A represent the result of a price ceiling or price floor, and which scenario is an example of these conditions?

A price floor and the large amount of corn stored in silos in the U.S. Midwest due to overproduction by farmers

The government sets the price of subsidized corn too low. Which of the following statements describes the result?

At that price, quantity demanded exceeds quantity supplied.

When the economy is operating at point C, the Federal Reserve may decrease the discount rate to

increase growth

Why do governments regulate natural monopolies?

To prevent prices from rising too high and to increase efficiency

The country of Lilliput has low unemployment and high consumer spending, and small businesses are thriving. However, prices are starting to rise throughout the economy. What should Lilliput’s government do to prevent inflation from happening?

Lower the income tax, which gives citizens more money to spend, and buy more services from civilian-owned businesses, which creates more jobs. INCORRECT

In the diagram above, what will happen if the government sets the minimum wage at Point A?

There will be a surplus of workers

Which of these is not a result of the federal government spending more than it earns?

Increased taxes INCORRECT

Inflation is low but the unemployment rate is the highest seen in several years. Economists report signs that show in six months the economy is likely to improve. The economy is likely in

expansion INCORRECT

How are national debt and deficit related?

The national debt is an accumulation of deficits.

In the diagram above, what will happen if the government sets the price for potatoes at point A?

The price of potatoes will rise to meet equilibrium. INCORRECT

Some products are produced most efficiently when there is a single supplier. What is this called?

Natural monopoly

How does the government help ensure fair prices for all citizens of a particular area served by one utility company?

By negotiating affordable rates with the supplier

Which of the following circumstances usually accompanies a period of economic expansion?

High inflation

Unemployment is low and inflation is rising, but slowly. Gross Domestic Product is also rising. The Federal Reserve may increase the reserve requirement at this point in order to

protect the public from the potential of inflation rising out of control

Explain how the Federal Reserve may use the discount rate and the reserve requirement to increase the money supply. What impact should these actions have on employment and why?

Note: Discount rate is the minimum rate of interest. The Federal Reserve also requires the given percentage of total deposits.

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