Question

Would it make sense to include (a) travellers' cheques, (b) student rail cards or (c) credit cards in measures of the money supply?

Short answer

Travellers' cheques could be included; student rail cards and credit cards should not.

Step-by-step solution

Understanding Money Supply Components

Before evaluating if items like travellers' cheques, student rail cards, and credit cards should be included in the money supply, we need to understand what the money supply consists of. Generally, money supply includes currency (coins and banknotes) and various types of deposits that are easily converted to cash, such as savings and checking accounts.

Evaluating Travellers' Cheques

Travellers' cheques are pre-printed, fixed-amount cheques designed to allow the person signing them to make an unconditional payment to someone else as a result of cashing it. They are accepted worldwide and can be converted directly into cash every time they are used, similar to a check or cash. Thus, they function like cash and could logically be included in the money supply.

Evaluating Student Rail Cards

Student rail cards are travel discount cards and do not have an intrinsic monetary value that can be directly exchanged into goods and services or deposited. They offer discounts but do not replace or directly convert into monetary transactions. Therefore, they cannot be considered a part of the money supply.

Evaluating Credit Cards

Credit cards provide a line of credit for users to borrow money up to a certain limit and repay it over time. They themselves are not money but rather a means to access a line of credit. Purchases made via credit cards involve a credit transaction rather than an immediate transfer of funds, hence they are not included in the money supply directly.

Key concepts

Travellers' Cheques

Travellers' cheques are a fascinating financial instrument that act much like cash. When you buy a travellers' cheque, you're essentially exchanging your money for a pre-printed, fixed-amount cheque. This cheque is like a promise that you can use it anywhere it's accepted, and it can be cashed directly like money.
Travellers' cheques hold value like cash but offer unique features:

• Security: They are safer than carrying cash because if they get lost or stolen, they can be replaced.
• Universal Acceptance: Originally crafted for travel, these cheques are widely accepted around the globe.
• Convertibility: They can be effortlessly converted into cash when needed.

Given these qualities, travellers' cheques closely resemble cash in function and therefore are often considered part of the money supply. They allow for direct and unconditional payments, which aligns them with the liquidity required in the concept of money supply.

Credit Cards

Credit cards don't actually represent money on their own but rather a convenient way to borrow funds. When you use a credit card, you're not using cash on hand; instead, you're borrowing money.

Here's how they work:

• Credit Line: Credit cards offer a line of credit, a preset amount of money you can borrow for purchases.
• Deferred Payment: The bank or financial institution pays the vendor on your behalf, and you repay the bank later.
• Interest Charges: If you do not pay the entire borrowed amount promptly, interest is charged on the remaining balance.

Because credit cards facilitate borrowing rather than immediate funding, they don't qualify as part of the money supply. They enable transactions but only through temporary credit rather than direct cash conversion.

Economic Concepts

Understanding the components of the money supply is an essential economic concept. The money supply includes various forms of money-like instruments that can be easily converted to cash.
Consider these key aspects:

• Liquidity: Elements of the money supply are highly liquid, meaning they can be quickly and easily converted to perform transactions.
• Components: The basic components include physical currency, checking accounts, and other highly liquid deposits.
• Exclusions: Items like student rail cards, which offer discounts but no tangible value for exchange, are excluded from the money supply.

The money supply is crucial to understanding broader economic health and monetary policy. It influences inflation, interest rates, and economic growth. By grasping these economic concepts, one can gain insight into how various financial instruments, like travellers' cheques and credit cards, fit into the larger financial picture.