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

Chapter Twelve: Money Mischief 295 CHAPTER TWELVE: QUESTIONS FOR REVIEW 1. If the Treasury Department decides to expand its supply of $1 coins in hopes that people will begin using them instead of dollar bills, is this inflationary? Why? Hint: Where do coins fit in the definition of money supply? 2. Using an appropriate diagram, illustrate what will happen to the purchasing power of money with a decrease in the rate of interest that the Fed charges banks at the discount window. 3. Using an appropriate diagram, illustrate what will happen to the purchasing power of money with an outbreak of Scrooge McDuck disease. This disease causes ordinary American’s to pull their cash out of banks and sit on hoards of coins. Preferably gold coins. 4. During the first decade of the 2000s, inflation was considered very low as measured by the CPI. Why was this a mistaken view of inflation? 5. Why does the Fed primarily use open market operations to control money supply? 6. Imagine savers are receiving nominal interest rates of 15% in 2015, compared to today’s 1-3%. Is that a good rate? Why or why not? 7. Why is asset inflation more dangerous than consumer inflation? 8. Summarize the pros and cons of rules and discretion in the conduct of monetary policy.