Question

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

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

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.

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.