Question

1. Imagine a world where everyone payments are digital, what purposes would we have for cash?

(a) Give as many reasons as you can why people would still hold cash

(b) What percentage of their income would you guess people would hold as cash, on average?

(c) What effect would this have on the money multiplier?

Answer 1

Below are the probable purposes one may need cash even if payments are digitalised:

- In a world of digital payments there would be a need for cash as digital payments are not foolproof and may fail at times. Cash can play a vitol role when there is a failure in digital payments.

- Since digital payments are dependent on internet services and majority of the population still do not have access to these services, cash is the only means of payment.

Lack of knowledge to use the payment service could lead to the use of cash.

- Payments are still suspectable to notorious hackers which makes your money prone to them and can also help in terrorism.

b) Based on the above points considering the need for cash may still arise I would guess that people would maintain around 25 percent of their income in cash. In case this amount is not used one can always use the excess cash for future investment.

c) An increase in digital payments helps banks and institutions. businesses both big and small have pools of money easily accessible thus encouraging credit capacity and giving an impetus to the money multiplier.