Question

Suppose that, in an economy, every shop allows electronic payment by making more point of sales (POS) terminals available. What are the effects of this facility on the demand for money and on the
price level?

Answer 1

Ans-

Effects of the facility of increasing use of electronic payment system:

1) With the introduction of new cashless payment system i.e. the electronic payment system, consumers are not required to go to banks frequently for withdrawing of cash in order to make payments of their routine transactions. Thus cost of visiting banks is also reduced.

2) Consumers are not required to convert their deposits to cash as all payments can be made electronically by which demand for money decreases.

3) According to the analysis of central bank with the use of electronic money, there is very low decrease in domestic currency in circulation but still more developments are required in the processing of electronic money.

4) E-money is not printed money like normal currency notes or deposits, payments are restricted to the amount stored in electronic device. So less risk of making more payments or risk of losing or theft of cash is reduced.

5) It involves slower transaction costs as compared to other payments instruments as no additional cost is involved in maintaining account balance with ATMs.

6) Use of electronic money would affect the independence of monetary policy i.e.decrease in amount of currency in circulation, so the revenue of central bank would be reduced which the central bank having a control over issuing of currency notes in the country, as a demand for currency notes are reduced.

7) Traditional monetary policy largely focuses on the opening of economies,increasing capital and investment markets, changes in exchange rates etc. but all these factors affects substantially with the use of electronic money and expected changes in monetary policy because of electronic money.

8) Because of use of electronic money, velocity of money increase which ensures financial transparency and help to control unregulated economy.

9) Use of electronic money helps the country to achieve sustainable economic development by making economic transactions more effective and thus integrating the economy with world economy..

10) Important feature of use of electronic money is that the Monetary Policies can control the rate of inflation i.e. reduce the rate of increase in goods and services and can stabilize the economy to some extent.

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