Question

Assume a new change in technology made using credit cards a lot easier, which caused people...

Assume a new change in technology made using credit cards a lot easier, which caused people to hold less cash.

a) Using the supply and demand for money, can you show what is going to happen to the price level on a graph?

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Answer #1

Ans. Lower cash to deposit ratio will increase the money supply in the market which at given money demand will create a situation of excess supply in the market causing interest to decrease. This will reduce the cost of borrowing inducing investment and consumption which will increase aggregate demand. As the level of aggregate supply is unchanged it will create a situation of excess demand in tge market pushing the prices up.

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