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

Chapter Eleven: Money, Money, Money! 272 CHAPTER ELEVEN ANSWERS 1. You would need to solve the double coincidence of wants; you need to hope that the fisherman needs a pair of shoes. Even if he or she does, what’s the likelihood that the farmer who would sell the chips to go with the fish needs a pair of shoes? Or even if so, aren’t shoes a lot more valuable than potatoes or fish? What if you only want one fish and potato? Economic performance would be poor in a rude society without money; transaction costs to arrange mutually beneficial exchanges would be very high, leading to less social cooperation. 2. No. If he is right, the Bible is wrong. Therefore, he is wrong. But we also know logically the idea of the most marketable commodity (Menger’s story) is correct and we’ve seen its application in modern times such as in POW camps. 3. Divisibility, durability, transportability, scarcity. If any of these attributes is missing, it makes exchange more difficult. 4. It seems at best representative; there certainly have been worse. History does not reflect kindly on fiat money. 5. No. They would need to gain additional reserves that ultimately must be supplied by the Fed. 6. New money is a liability since it is a claim on current purchasing power while it is a promise to pay back in the future. 7. The money multiplier can be up to the inverse of the required reserve ratio (or 10) such that $5M in securities purchases could lead to $50M in additional money. 8. Assume a 10% required reserve ratio (current policy), $1M could go up to $10M and $5k could go to $50K. For the T-accounts, simply follow the example seen in the text.