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

Expert Answers

An illustration of the letter 'A' in a speech bubbles

A decrease in credit and debit cards would increase our need for currency. Without currency, we would not be able to purchase things. Many people use credit and debit cards to make online purchases. A decrease in credit and debit cards may therefore increase the amount of business received by brick and mortar stores unless more people used things like Paypal and Venmo—which facilitate electronic purchases.

As a result of a reduction in the number of credit cards available, people would turn more towards cash and checking accounts in order to make purchases. People may inquire about store credit, but this would be less efficient than using a credit card (which is like having a line of credit wherever that credit card is taken). People would have to have the cash on hand to make purchases, which would decrease the level of personal debt people carried but may slow the economy down, as people would purchase less. Credit cards allow one to extend the time needed to pay off goods, though one will pay a high interest rate for this privilege.

A reduction in credit and debit card availability would increase the demand for cash, but people may purchase less knowing that they can only call upon a finite amount of cash that they can see and hold.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

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.

Approved by eNotes Editorial Team