Question

Assume that an increasing number of supermarkets, shops and grocery stores accept credit and debit cards and more consumers use these cards to do their shopping. How will the money multiplier and money supply be affected?

Answer 1

Use of plastic money affects the amount of money in circulation. This amount of money in circulation would further affect the money supply which is basically the sum of currency and demand deposits. The money multiplier, on the other hand, is calculated as the inverse of banks' reserves. The use of credit card reduces the reserves of the banks as the credit card money is simply a loan made by the banks. This thus affects the money mulyiplier. Higher use of debit and credit card thus reduces the money supply and increases the money multiplier.