Paid vs. Advertising Links Google

So I recently had some inquires from others requesting some paid advertising text links.

Questions:

1. Since Google penalizes paid links now I assume you have to use the "nofollow" tag on any advertising links you are receiving money for correct?
   
2. Should all regular affiliate links have a "nofollow" tag as well?
   
3. How does Google know when you simply are suggesting a quality website to your users or receiving payment for that link? It seems risky to even link to another site nowadays without using the "nofollow" tag which seems wrong? Do they assume more than one or two outgoing links on a page that do not have "nofollow" tags suspicious?

Thanks,

Chad

 

You raise an intersting point. My assumption is there are no direct keywords on the page suggesting you sell or buy links. Also I think the link has to be relevant to the content on the page. But where do they draw the line? How do they determine paid from real?
perhaps its only early and google are manually attacking obvious and known link farms.