Questions:
1. Explain in your own words the process by which banks "create" money. What is the reserve requirement and what role does it play in money creation?
2. Discuss the impact of that ability to create money on the economy during an inflationary gap and during a recessionary gap. Considering the higher rates of unemployment and the likelihood of lower prices during a recessionary gap, do banks, with their lending policies, contribute to a recovery?
3. The only thing backing up a nation's currency (fiat money) in the modern world is faith in the government issuing it. If this is so, what should governments do to maintain a stable currency? How can the Central Bank (the Federal Reserve) build trust in the currency? What actions would undermine a currency?