Question

Americans have recently accumulated record levels of credit card debt. As a result, the risk of bankruptcy has increased significantly for a large segment of the population. Congress decides that it is necessary to ban credit cards to protect the public from such risk. How would such a ban affect the velocity of money? Explain your answer.

Answer 1

Velocity of money reflects how frequently people use currency in the form of bills and coins. If people are using more credit cards and other online sources then people will be using less cash and so banks have to supply less currency. This will increase the velocity of money (M * V remains unchanged)

But if credit cards are banned, people have to use currency bills more frequently and so banks have to supply more currency bills which is likely to decrease velocity of money.