database? it's database server or database file?

Network Approaches
Your choice of RMI or serialized objects will not affect your grade, but no other approach is acceptable. In either case, the program must allow the user to specify the location of the database, and it must also accept an indication that a local database is to be used, in which case, the networking must be bypassed entirely. No authentication is required for database access.

I am confused by the key word database here

. It means server or just the data file?

in local mode the database file will be accessed (and changed) directly by your client application.

in networked mode your client application will access a server application over a network protocol (rmi or sockets). And it's the server application that will access (and change) the database file.