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Chapter 16 Homework

The federal reserve is not actually part of the government. They are a bank that has been given a government-approved monopoly on producing currency. Excluding the Fed from government politics is supposed to safeguard against corruption. But they are extremely powerful in that they can influence the value of every dollar in existence through their decisions to print currency. This in turn influences incentives for the general public, and perhaps even more effectively than legislation.

Money stores value over time. For example, gold can be handed down for generations and will still be valuable because there is a finite amount on the planet. Money is also liquid, and can easily be converted. Money helps an economy grow because it makes transactions between individuals easier. If I have apples to trade, but I don't want anymore of your oranges, then we are at an impasse (and hopefully you can find some other parties to bargain with). If people can get what they need easily, their standard of living and productivity will increase.  This enables a country's economy to grow.

However, currency does not hold value well. Dollar bills are currency. They are only worth as much as people are willing to trust. What's interesting is that some of the USA's currency is not even physically printed. Some of it only exists on computer ledgers. And the Fed can decide when to produce more. So if the dollar is not finite, then it's value (demand) can be manipulated by changes in the supply. It is scary to think that many contracts agree to pay interest on something with such an illusory nature.

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