Question

Question 1: Assume a new change in technology made using credit cards a lot easier, which caused people to hold less cash.

a) What does this mean for the demand for money?

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

c) What can the Fed do in this situation to keep the price level stable? Show it using supply and demand.

Answer 1

A :-

When the major part of the population will use the credit cards that will make the big impact on the demand and supply on the economy . It deemed to the increase demand in future , because people can spent more money so demand will also increase .

B :-

When people use more credit cards and less cash it will help to  prevents many crimes associated with cash such as fake currencies, terror financing, and black money circulation in the country etc. Hence, the supply of money will also increase but the demand will more increase as compare to supply becase poeple can spent more than their income , the demand will more increase as compare to supply , so it will directly affect on the level of price and prices of products will aslo increase .

C :-

Due to increase in money supply in the economy it will cause the prices of the products will increase so the country so fed will follow some steps of the monetary policies for stablisation of prices . Monetary policy will rise intrest rates for correct the situation of inflation . The fed helps economy to get overcome the probem of inflation and makes the prices stable.