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How does a reduction in the availability of debit and credit cards affect the demand...

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Vtress | eNotes Newbie

Posted November 18, 2013 at 12:19 AM via web

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How does a reduction in the availability of debit and credit cards affect the demand for money?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted November 18, 2013 at 12:58 AM (Answer #1)

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If there were to be a reduction in the availability of credit and debit cards, it would lead to an increase in the demand for money.  It is likely that the increase would not be very big, however. In order to understand why this is, we must first look at the definition of the demand for money.

We might think that “demand for money” refers to how much money or wealth people want to have.  But this is not the case.  Demand for money is the demand for holding wealth in cash or in bank deposits.  People typically do not hold all of their wealth in money.  Instead, they only need a limited amount of money and they keep the rest of their wealth in things like property and stocks and bonds.

How do credit and debit cards affect this?  They make it so that we do not need to hold quite as much money in cash and bank deposits on a day-to-day basis.  If we can use a credit card instead of paying cash, we do not have to have cash on hand.  Instead, we can simply charge our purchases and only pay for them at the end of the billing period (or we can put off paying the full prices, even though that is not a very good idea).  This reduces the amount of money that we demand. 

If credit and debit cards reduce the amount of money we need to have on hand, they reduce our demand for money.  If this is the case, a decrease in their availability will increase our demand for money.

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