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Chapter 3: Q.11 (page 111)

If you use an online payment system such as PayPal to purchase goods or services on the Internet, does this affect the M1 money supply, the M2 money supply, both, or neither? Explain

Short Answer

Expert verified

The M1 and M2 money supplies would theoretically remain unchanged, but money would be transferred from your checking account to a third party once the credit transaction was completed.

Step by step solution

01

Step 1. Introduction

Money is a tool that acts as a medium of exchange in economic transactions. It facilitates trade and acts as store of value. There are different measures of money supply which calculate the availability of money in the market.

02

Step 2. Explanation 

M1 and M2 are both unaffected: Although PayPal and many other e-money systems function similarly to conventional forms of money in terms of facilitating purchases of goods and services, they are not included in M1 or M2. Due to the credit-based nature of PayPal and similar payment systems, future payments for funds used today must be made with money already in the system, such as currency or funds in a bank deposit account.

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Most popular questions from this chapter

In ancient Greece, why was gold a more likely candidate for use as money than wine?

Go to the St. Louis Federal Reserve FRED database, and find data on currency (CURRSL), traveler’s checks (TVCKSSL), demand deposits (DEMDEPSL), and other checkable deposits (OCDSL). Calculate the M1 money supply, and calculate the percentage change in M1 and in each of the four components of M1 from the most recent month of data available to the same time one year prior. Which component has the highest growth rate? The lowest growth rate? Repeat the calculations using the data from January 2000 to the most recent month of data available, and compare your results.

In April 2009, year-over-year the growth rate of M1 fell to 6.1%, while the growth rate of M2 rose to 10.3%. In September 2013, the growth rate of the M1 money supply was 6.5%, while the growth rate of the M2 money supply was about 8.3%. How should Federal Reserve policymakers interpret these changes in the growth rates of M1 and M2?

Was money a better store of value in the United States in the 1950s than in the 1970s? Why or why not? In which period would you have been more willing to hold money?

Three goods are produced in an economy by three individuals: Good Producer Apples Orchard owner Bananas Banana grower Chocolate Chocolatier If the orchard owner likes only bananas, the banana grower likes only chocolate, and the chocolatier likes only apples, will any trade between these three persons take place in a barter economy? How will introducing money into the economy benefit these three producers?
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