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Chapter 15: Q1. (page 572)

PayPal accounts aren’t counted as part of the money supply. Should they be? Why or why not?

Short Answer

Expert verified

PayPal accounts are not counted as a part of the economy's money supply since regulators consider services like Paypal as money transmitters and not as banks. If money supply includes services like PayPal, it will disturb the price stability in the economy.

Step by step solution

01

Explanation

The services such as PayPal are considered money transmitters that transfer your money from one place to another. PayPal is not a bank that keeps your money safe; therefore, the economy's money supply does not count such services.

However, suppose such services become a part of the money supply. In that case, the economy's price stability will get disturbed since the federal reserve does not have any direct control over such services as it has on the bank. The absence of the Fed's control and regulation will hurt the economy's financial stability. Therefore, PayPal should not be counted in the money supply.

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Most popular questions from this chapter

Explain how each of the following would affect the quantity of money demanded. Does the change cause a movement along the money demand curve or a shift of the money demand curve?

a. Short-term interest rates rise from 5% to 30%.

b. All prices fall by 10%.

c. New wireless technology automatically charges supermarket purchases to credit cards, eliminating the need to stop at the cash register.

d. In order to avoid paying a sharp increase in taxes, residents of Laguria shift their assets into overseas bank accounts. These accounts are harder for tax authorities to trace but also harder for their owners to tap and convert funds into cash.

Malia must decide whether to buy a one-year bond today and another one a year from now or buy a two-year bond today. In which of the following scenarios is she better off taking the first action? The second action?

a. This year, the interest on a one-year bond is 4%; next year, it will be 10%. The interest rate on a two-year bond is 5%.

b. This year, the interest rate on a one-year bond is 4%; next year, it will be 1%. The interest rate on a two-year bond is 3%.

Which of the following will increase the opportunity cost of holding cash or reduce it? Explain.

a. In order to attract new customers, the new internet payment firm, PayBuddy, announces it will pay0.5% interest on cash balances in a PayBuddy account.

b. To attract more deposits, banks raise the interest paid on six-month CDs.

c. In an effort to increase holiday sales, stores offer one-year zero-interest deals on purchases made with store credit cards.

In setting monetary policy, which central bank—one that operates according to a Taylor rule or one that operates by inflation targeting—is likely to respond more directly to a financial crisis? Explain.

Why does monetary policy affect the economy in the short run but not in the long run?
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