Chapter 4 Exercises: The Money Question

Exercise 1: Evaluating a New Digital Currency Against the Six Properties

Difficulty: Intermediate | Estimated Time: 45 minutes | Bloom Level: Evaluate

Scenario

A tech startup has launched a new digital currency called SolarCoin. Here are its key features:

• Supply mechanism: New SolarCoins are minted when verified solar panels generate electricity. One megawatt-hour of solar energy production generates one SolarCoin. There is no cap on total supply, but issuance is limited by real-world solar panel installations.
• Transaction speed: 2,000 transactions per second on its blockchain.
• Divisibility: Each SolarCoin divides into 1 million "rays."
• Portability: Fully digital; accessible via smartphone app.
• Privacy: Transactions are recorded on a public blockchain with pseudonymous addresses (similar to Bitcoin).
• Backing: Each SolarCoin represents one MWh of verified solar energy generation, though it is not redeemable for electricity.
• Adoption: Currently accepted by approximately 200 merchants worldwide, primarily renewable energy companies and environmental nonprofits.

Tasks

Part A: Property-by-Property Evaluation

Create a table evaluating SolarCoin against each of the six properties of good money discussed in this chapter. For each property, assign a rating (Excellent / Good / Moderate / Poor) and provide a 2-3 sentence justification. Your table should look like this:

Part B: Comparative Analysis

Compare SolarCoin to Bitcoin and the US dollar on the two properties where SolarCoin's design is most distinctive. What specific tradeoffs has SolarCoin made, and who would those tradeoffs favor?

Part C: Viability Assessment

Write a 300-word assessment of SolarCoin's viability as money. Consider: What is SolarCoin's strongest property? Its weakest? What would need to change for SolarCoin to achieve widespread adoption? Is the connection to solar energy generation a strength (it gives the currency a form of backing) or a weakness (it limits supply growth to a factor outside monetary control)?

Part D: The Regression Theorem Test

Apply the Regression Theorem (Mises) to SolarCoin. Does SolarCoin have a non-monetary use-value that could anchor its initial acceptance as money? The connection to verified solar energy generation is suggestive — but does it constitute genuine commodity backing, or is it a branding exercise? Compare SolarCoin's claim to commodity backing with Bitcoin's (which has none) and gold-backed currencies (which had full backing). Where does SolarCoin fall on this spectrum, and what does that imply for its path to acceptance?

Part E: Network Effects and Chicken-and-Egg Problems

SolarCoin currently has 200 merchants. The US dollar has millions. Bitcoin has tens of thousands. Write a 150-word analysis of SolarCoin's "chicken-and-egg" problem: merchants won't accept a currency that customers don't hold, and customers won't hold a currency that merchants don't accept. Identify two specific strategies SolarCoin could use to bootstrap its network effects. For each strategy, explain why it might work and what could go wrong.

Evaluation Criteria

• Property evaluations are accurate and well-justified (not just restatement of the scenario)
• Comparative analysis identifies meaningful differences, not superficial ones
• Regression Theorem analysis shows understanding of the relationship between use-value and monetary acceptance
• Network effects analysis demonstrates awareness of the bootstrapping problem that all new currencies face
• Viability assessment demonstrates understanding of what makes money work in practice, not just in theory

Exercise 2: Debate Preparation — Cryptocurrency as Money

Difficulty: Advanced | Estimated Time: 60 minutes | Bloom Level: Evaluate

Setup

You will prepare arguments for one side of the following debate proposition:

"Resolved: Within 25 years, a cryptocurrency (or basket of cryptocurrencies) will serve as the primary medium of exchange for at least one G20 economy."

Your instructor will assign you either the FOR or AGAINST position. Regardless of your personal views, you must argue your assigned position as persuasively as possible.

Tasks

Part A: Three Strongest Arguments

Prepare your three strongest arguments for your assigned position. For each argument:

1. State the argument in one clear sentence.
2. Provide evidence. Cite at least one real-world data point, historical precedent, or economic theory that supports the argument. You may use examples from this chapter or conduct additional research.
3. Anticipate the rebuttal. What is the strongest counterargument to your point? Write it out in 2-3 sentences.
4. Respond to the rebuttal. How would you address the counterargument? This is where the strongest debaters distinguish themselves.

Part B: Your Opponent's Best Argument

Identify what you believe is the single strongest argument for the opposing side. Explain why it is strong and how you would attempt to neutralize it during the debate.

Part C: The Crux

In 100-150 words, identify what you believe is the "crux" of this debate — the single factual or theoretical question whose resolution would most likely determine the outcome. For example: "The crux is whether Bitcoin's volatility is a transitional phase or a permanent feature." Explain why this is the crux and what evidence would resolve it.

Evaluation Criteria

• Arguments are grounded in economic reasoning and evidence, not ideology or assertion
• Rebuttals and counter-rebuttals demonstrate genuine engagement with opposing views
• The "crux" identification shows sophisticated analytical thinking about what drives the disagreement

Instructor Note

This exercise works best when students are randomly assigned positions rather than choosing their preferred side. The pedagogical goal is the ability to construct rigorous arguments for positions you may not personally hold — a skill that is essential for evaluating the highly polarized discourse around cryptocurrency.

Exercise 3: Inflation Erosion vs. Bitcoin Volatility — A Quantitative Comparison

Difficulty: Intermediate | Estimated Time: 30 minutes | Bloom Level: Analyze

Context

Critics of fiat currency emphasize the loss of purchasing power due to inflation. Critics of Bitcoin emphasize its extreme price volatility. But how do these two forms of "value loss" compare over real time periods?

Data

Use the following data for your analysis (simplified for this exercise):

US Dollar Purchasing Power (CPI-adjusted, base year 2019 = $1.00): | Year | Purchasing Power | |---|---| | 2019 | $1.00 | | 2020 | $0.987 | | 2021 | $0.941 | | 2022 | $0.870 | | 2023 | $0.841 | | 2024 | $0.817 |

Bitcoin Price (annual average in USD): | Year | Avg Price | |---|---| | 2019 | $7,200 | | 2020 | $11,100 | | 2021 | $47,400 | | 2022 | $19,600 | | 2023 | $28,300 | | 2024 | $62,000 |

Tasks

Part A: Dollar Erosion Calculation

If you held $10,000 in cash (not invested) from the start of 2019 through the end of 2024, how much purchasing power did you lose? Express this as both a dollar amount and a percentage.

Part B: Bitcoin Value Trajectory

If you converted $10,000 to Bitcoin at the start of 2019 (at the average 2019 price), how much would your Bitcoin have been worth at the end of each year through 2024? Calculate the dollar value for each year.

Part C: Volatility Analysis

Calculate the maximum peak-to-trough decline in your Bitcoin holdings over the 2019-2024 period. At the worst point (2022), how much value had you lost compared to your original $10,000 investment — even though you eventually gained?

Part D: The Hard Question

Write a 200-word response to this question: "Which is a greater threat to a typical household's financial security — the slow, predictable erosion of inflation or the fast, unpredictable swings of cryptocurrency?" Explain why this question cannot be answered in purely mathematical terms and what additional factors (time horizon, risk tolerance, income stability, access to financial instruments) affect the answer.

Evaluation Criteria

• Calculations are correct and clearly shown
• Part D demonstrates understanding that "which is worse" depends on context, not just raw numbers
• Student avoids the trap of declaring one definitively "better" without acknowledging the tradeoffs

Exercise 4: Hyperinflation Case Research

Difficulty: Intermediate | Estimated Time: 45 minutes | Bloom Level: Analyze

Task

Research a country that has experienced or is currently experiencing hyperinflation (defined as a monthly inflation rate exceeding 50%). Some candidates: Venezuela, Zimbabwe, Argentina, Lebanon, Turkey (high inflation, not technically hyperinflation), the Weimar Republic (historical).

Write a structured analysis (approximately 500-700 words) addressing the following questions:

Part A: What Caused It?

Identify the 2-3 most important causes of the hyperinflation in your chosen country. Was it excessive money printing? War? Supply-chain collapse? Corruption? Loss of productive capacity? Be specific — "the government printed too much money" is a symptom, not a root cause. What drove the government to print?

Part B: How Did Citizens Cope?

What strategies did ordinary people use to protect their wealth and conduct daily commerce? Did they switch to foreign currencies (dollarization)? Barter? Commodity hoarding? Did cryptocurrency play a role? If so, how significant was it compared to other coping mechanisms?

Part C: Would Cryptocurrency Have Helped?

Evaluate whether widespread cryptocurrency adoption would have mitigated the harm of hyperinflation for ordinary citizens. Consider: - Access barriers (internet availability, smartphone ownership, digital literacy) - Volatility (would Bitcoin's price swings have been better or worse than the local currency's collapse?) - Practical usability (could people actually buy food and pay rent with crypto?) - Off-ramp problems (if local currency is collapsing, can crypto be converted to stable foreign currency?)

Part D: The Structural Question

Could cryptocurrency have prevented the hyperinflation from happening in the first place? Or would the underlying causes (war, corruption, supply shocks) have produced the same outcome regardless of the monetary technology?

Evaluation Criteria

• Research demonstrates genuine investigation, not surface-level summaries
• Analysis distinguishes between cryptocurrency as a coping mechanism (for individuals) and cryptocurrency as a structural solution (for the economy)
• Student honestly addresses the limitations of cryptocurrency in crisis conditions, not just its theoretical advantages

Exercise 5: Comparative Monetary Policy Analysis

Difficulty: Advanced | Estimated Time: 60 minutes | Bloom Level: Evaluate

Context

Three different monetary systems have three different approaches to money supply management:

1. Bitcoin: Fixed cap of 21 million coins. New issuance halves approximately every four years. No entity can change the rules without broad consensus. Monetary policy is completely predetermined.

2. Ethereum (post-EIP-1559): No fixed cap, but a burn mechanism destroys a portion of transaction fees. When network usage is high, more ETH is burned than created, making the supply deflationary. When usage is low, supply increases. Monetary policy is dynamic but rule-based.

3. US Dollar (Federal Reserve): No fixed cap. Money supply managed by the Federal Reserve through interest rate adjustments, open market operations, and other tools. Monetary policy is discretionary, guided by dual mandate of maximum employment and stable prices.

Tasks

Part A: Scenario Analysis

For each of the following economic scenarios, explain how each of the three monetary systems would respond. Who (or what mechanism) makes the decision? What are the likely effects?

• Scenario 1: Severe Recession. GDP drops 5%, unemployment doubles, consumer spending plummets. The economy needs stimulus.
• Scenario 2: Sudden Inflation Spike. A supply chain disruption causes prices to rise 15% in six months. The economy needs cooling.
• Scenario 3: Rapid Technological Growth. AI and automation drive a productivity boom. GDP grows 8% annually. More goods are being produced, but the money supply response differs.

Part B: Tradeoff Matrix

Create a table comparing the three systems on the following criteria:

For each cell, provide a brief rating (High / Medium / Low) and a one-sentence explanation.

Part C: Design Your Own

If you could design a monetary policy from scratch — combining elements of any or all three systems — what would it look like? Describe the rules in 200-300 words. Consider: - Would you have a fixed supply, a dynamic supply, or discretionary management? - Who (or what) would make decisions about the money supply? - How would the system handle the scenarios from Part A? - What are the tradeoffs of your design?

Evaluation Criteria

• Scenario analysis demonstrates understanding of how each system's mechanisms actually work (not just what they claim to do)
• Tradeoff matrix is honest — no system should receive all "High" or all "Low" ratings
• Custom design shows creative synthesis, not just restatement of one existing system

Exercise 6: Gresham's Law in Practice

Difficulty: Beginner | Estimated Time: 20 minutes | Bloom Level: Apply

Context

Gresham's Law states that "bad money drives out good" — when two forms of money circulate at a fixed exchange rate, people spend the less valuable form and hoard the more valuable one.

Tasks

Part A: Historical Application

Research one historical example of Gresham's Law in action (other than the examples given in the chapter). Describe the situation in 100-150 words: What were the two forms of money? Why was one considered "good" and the other "bad"? How did people's behavior change?

Part B: Modern Application

You live in a country where both the local currency (which is inflating at 25% per year) and US dollars are commonly used. Using Gresham's Law, predict: - Which currency will people prefer to spend in shops? - Which currency will people prefer to save? - If the government requires all taxes to be paid in the local currency, how does this affect the dynamic?

Part C: The Bitcoin Paradox

If Bitcoin appreciates in value over time (as its proponents expect), Gresham's Law predicts that people will hoard Bitcoin and spend fiat. But if everyone hoards Bitcoin, it cannot function as a medium of exchange. In 150-200 words, explain this paradox and evaluate at least one proposed solution (e.g., the Lightning Network enabling small everyday transactions, stablecoins serving as the "spending money" while Bitcoin serves as "saving money").

Evaluation Criteria

• Historical example is accurately described and correctly applies Gresham's Law
• Modern application demonstrates understanding of the law's implications for dual-currency economies
• Bitcoin paradox discussion shows awareness of the tension between store-of-value and medium-of-exchange functions

Exercise 7: Python Exploration — Money Supply and Inflation Tools

Difficulty: Beginner | Estimated Time: 30 minutes | Bloom Level: Apply

Context

This chapter includes two Python scripts in the code/ directory: - money_supply_viz.py — Visualizes M1/M2 money supply growth since 1971 - inflation_calculator.py — Calculates purchasing power erosion and compares cash vs. Bitcoin

Tasks

Part A: Run and Interpret

Run the inflation_calculator.py script. Using its output, answer the following questions:

1. How much purchasing power has $100 from 1971 lost by 2024?
2. What is the compound annual growth rate of the M2 money supply since 1971?
3. If you had invested $10,000 in Bitcoin at the start of 2019, what was the worst moment (highest peak-to-trough loss) between 2019 and 2024?

Part B: Modify the Calculator

The inflation_calculator.py script compares holding cash versus holding Bitcoin. Modify the compare_stores_of_value function to also calculate what would have happened if you had invested the same amount in a simple savings account earning 2% annual interest (compounded yearly). Add this as a third option in the comparison output. Does the savings account close the gap between cash and Bitcoin?

Part C: Critical Interpretation

The money supply visualization shows M2 growing from $0.71 trillion in 1971 to $21 trillion in 2024 — a 30x increase. Write a 200-word response to the following question: "Does the 30x growth of M2 prove that the Federal Reserve has been recklessly printing money?" Consider: Has the US economy also grown during this period? What is the relationship between money supply growth and GDP growth? Is there a meaningful difference between money supply growth that tracks economic growth and money supply growth that exceeds it?

Part D: Visualization Extension (Optional)

Modify money_supply_viz.py to add a third line showing US GDP (in nominal terms) alongside M1 and M2. You can use the following approximate GDP data points (in trillions):

How does the relationship between money supply growth and GDP growth change over time? Is the gap widening, narrowing, or stable?

Evaluation Criteria

• Part A answers are numerically correct, drawn from actual script output
• Part B modification is functional and the comparison is fair (same time period, same starting amount)
• Part C demonstrates understanding that money supply figures must be interpreted in economic context, not in isolation
• Part D visualization clearly shows the relationship between the three series

Exercise 8: The Money Museum — A Thought Experiment

Difficulty: Beginner | Estimated Time: 20 minutes | Bloom Level: Understand

Scenario

Imagine you are curating a "Museum of Money" with exactly five exhibits, each representing a critical moment in the evolution of money. Your exhibits must span from the earliest forms of money to the present day, and each must illustrate a key concept from this chapter.

Tasks

Part A: Choose Your Five Exhibits

For each exhibit, provide: 1. A title (e.g., "The Lydian Stater: The First Standardized Coin") 2. The approximate date or era 3. A 50-75 word description of what the exhibit shows and why it matters for understanding money 4. Which concept from this chapter it best illustrates (e.g., commodity money, seigniorage, Gresham's Law, the transition to fiat, network effects)

Part B: The Controversy Room

Your museum also has a special "Controversy Room" with a single exhibit that presents a genuinely unresolved question about money. Choose one of the following — or propose your own:

• "Is Bitcoin Gold 2.0 or Tulip Mania 2.0?"
• "Should Central Banks Have the Power to Create Money?"
• "Is Inflation a Hidden Tax or the Price of Prosperity?"

Write the exhibit placard (150-200 words) presenting both sides of the controversy without taking a side. A museum visitor should leave understanding the question better, not feeling that the museum told them what to think.

Evaluation Criteria

• Five exhibits span the full arc of monetary history (not clustering in one era)
• Each exhibit description is accurate and clearly connects to a chapter concept
• The Controversy Room placard presents genuine balance — a reader cannot determine which side the author favors