No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eleven: Money, Money, Money! 271 CHAPTER ELEVEN: QUESTIONS FOR REVIEW 1. In a world without money, what happens if you want to eat fish and you are a shoemaker? Discuss the problems that would arise. What do you think would happen to overall economic performance in a world without money? 2. University of Chicago’s Cass Sunstein says that money is a creation of the state. Is he right? 3. List four attributes of money, and identify problems with money if they don’t have these attributes. If a particular type of money didn’t have all these attributes, could it still serve as money? What would be the result? 4. The U.S. Federal Reserve is considered a “good” central bank, yet the value of the dollar has fallen 96% since its creation. Is this an aberration or the normal result of government controlled money? 5. Can banks create money “out of thin air” if they have already loaned out all their reserves? 6. Is newly created money an asset or a liability for the economy as a whole? 7. Without using T-accounts, calculate the amount of additional money that could enter the economy if the Fed bought $5,000,000 in securities and the required reserve ratio is 10%? Challenge Question (not expected for introductory students, but let’s see what you can do!) 8. Calculate the amount of new money that could be created by the banking system if the Federal Reserve added $1,000,000 to banking system reserves. Do the same with $5,000 in initial reserves. Do this with at least two T-accounts to demonstrate you understand.