Question

Why are credit cards not included in the money supply even though they can be used easily for transactions? (Hint: What do you think happens when you use a credit card to purchase an item at a store?)

Answer 1

The money that is included in the money supply is an asset which serves as a medium of exchange, a unit of account, a standard of value and a tool for deferred payment. Therefore, the money supply includes various financial assets such as currencies and deposits.

Using credit card is like taking a credit which is a liability and not an asset. After a credit card transaction, the liability must be paid off using financial assets like money. Therefore, using a credit card is like taking a bank loan for a transaction with a promise to pay back. Loans are not included in the money supply.