Question

All else being equal,how would each of the following affect demand for narrow and broad money.Explain.

1.Banks introduce overdraft protection,under which funds are automatically transferred from savings to checking as needed to cover checks.

2.A crackdown reduces the illegal drug trade(which is carried out largely in currency).

Answer 1

1) Demand for narrow money - decrease

Demand for broad money - increase.

Demand for broad money represents the money supply. Demand for narrow money represents the demand for most liquid assets like coins and currency.

Automatic transfer of funds will reduce the demand for notes and coins as they are now used in the transaction. Therefore , demand for narrow money will fall.

Automatic transactions will speed up with process of transaction. Businesses will be greatly benefited. So , demand for broad money will increase.

2) Demand for narrow money - Decrease.

Demand for broad money - Decrease.

( Demand for narrow money will decline as illegal drug trade happens in currency. Demand for broad money will also decline as those who are part is such an illegal business won't want to excuse themselves.)