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Suppose that due to extensive use of mobile apps for payments people need to hold less...

Suppose that due to extensive use of mobile apps for payments people need to hold less cash. How does this development affect the demand for money? What is the impact on the price level? If the Fed wants to keep the price level stable, what should it do? Draw money demand and money supply diagram to explain. Label the diagram clearly.

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Answer #1

Due to extensive use of mobile apps to make payments , the demand for money will decrease . This will the cause the price level to decrease because with reduced money demand , prices must fall to maintain equality of real money demand and real money supply .

To maintain the prices , the fed must decrease the money supply .

in diagram, initially the price level is OP1when demand = Md and supply = Ms . decrease in demand causes the curve to shift to Md' . If supply remains same price would fall to OP2 . To maintain price at OP1 , fed would reduce money supply to Ms' such that price remains at OP1.

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