In the article "How much is the per capita money supply in the U.S.?" The money supply is a measure of the total value of monetary assets in an economy. Ph.D., Business Administration, Richard Ivey School of Business, B.A., Economics and Political Science, University of Western Ontario. The amount of U.S. currency outstanding averages to about $2,800 per person in the U.S. We defined money as anything that is generally accepted as a means of payment, is a store of value, can be used as a unit of account or a standard of deferred payment. Since credit cards are loans, they do not fall under M1, M2 or M3 they are not considered to be part of the money supply, as such, the answer is "none of the above." M3 includes M2 plus large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada.". All rights reserved. The answer is no. The money part of the transaction between you and the credit card company only comes into play when you pay your bill. Since credit cards do not fall under M1, M2 or M3 they are not considered to be part of the money supply. Greed Is Good or Is It? Table 1 South Africa's M1 money supply, 2016 (Source: South African Reserve Bank: 2016). It is thus a broader definition of money than M1. What Is Deflation and How Can It Be Prevented? For example, M2 includes savings deposits in banks, which are bank accounts on which you cannot write a check directly, but from which you can easily withdraw the money at an automatic teller machine or bank. Credit cards are a. included in the m2 definition of the money supply, but not in the m1 definition. The $50 I will pay my girlfriend tomorrow is money, but the obligation I hold between today and tomorrow is not money. A broader definition of money, M2 includes everything in M1 but also adds other types of deposits. M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds. Buy Find arrow_forward. Where do Credit Cards fit in? A credit card is not a part of the M1 or M2 money supply, and as a matter of fact, is not part of the money supply at all. d. Neither answer includes credit card balances. Included in both the M1 and the M2 definitions of the money supply OB. M2 is a broader measure of the money supply than M1… M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits. If your answer is about “credit cards,” then you are really talking about spending M1—although it is M1 from the account of the credit card company, which you will repay later when you credit card bill comes due. M2 money supply is less liquid in nature and includes M1 plus all other short-term and medium-term deposits of the domestic private sector with monetary institutions (Mohr: 2015). This obligation to the credit card company does not represent money. © copyright 2003-2020 Study.com. 130. Which definition of the money supply includes credit cards? When I repay the loan I will pay her $50 which will be in the form of money. Cheque and credit card are not money (not under M1 & M2) because cheque give to the bank transfer into money and credit card purchase is a loan, a promise to pay back in future. Sciences, Culinary Arts and Personal It also added $4 trillion in credit to banks to keep interest rates down. True or false and why? Depending on how liquid the assets are, there are different measures of the money supply. 12. Credit cards are O A. Are they money, too? M1 is the total of physical currency outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits. MMMF accounts held by institutions are not counted in M2. Figure 27.3 The Relationship between M1 and M2 Money M1 and M2 money have several definitions, ranging from narrow to broad. M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits. Credit cards are not money, but rather devices by which money is lent—money that must be paid back. I do not have the $50 so I get my girlfriend to pay for the game on my behalf with the promise that I'll pay her back at some later date. ISBN: 9781337613040. We quoted the Federal Reserve Bank of New York as stating: "[M1] consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. Tucker. O part of both M1 and M2. Cash in your pocket certainly serves as money. If you buy the game using a credit card, the credit card company will pay the shopkeeper today and you will have an obligation to pay the credit card company when your credit card bill comes in. M1/M2 CARBINE PARTS & ACCESSORIES. Since gift cards can only be used for a particular purpose, then they are not part of M1. E. Credit cards. For the following list of items, indicate if they are in M1, M2, or neither: While being 30 days late is generally considered delinquent, it … Credit is not a form of money, since it … M1 = coins and currency in circulation + checkable (demand) deposit + traveler’s checks. Let's take a look at what is considered to be money and where credit cards fit in. A credit card is not a part of the M1 or M2 money supply, and as a matter of fact, is not part of the money supply at all. Credit cards are the most popular payment method in the world. So for example credit cards m1 or m2 has great advantages, but it also hides some subtleties. Credit card delinquency occurs when a cardholder falls behind on making required monthly payments. included in neither the M1 definition of the money supply nor in the M2 … Supporting Your Message With Primary and Secondary Research, Rational Expectations in the Economy and Unemployment, Quantity Theory of Money: Output and Prices, Money as a Store of Value: Definition & Overview, Open Market Operations & the Federal Reserve: Definition & Examples, Fractional Reserve System: Required and Excess Reserves, Representative Money: Definition & Overview, Money as a Unit of Account: Definition, Function & Example, Demand-Pull Inflation: Definition, Theory, Causes & Examples, What is Deflation? If we consider the loan as money and the payment of the loan as money we're essentially counting the same transaction twice. For the following list of items, indicate if they are in M1, M2, or neither: Your $5,000 line of credit on your Bank of America card $50 dollars’ worth of traveler’s checks … Publisher: Cengage Learning. M1 includes more than just currency because a. other assets can also be used to make transactions to buy goods and services.
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