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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.

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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

The money supply is the entire amount of money in circulation, including cash, coins, and bank account balances. The money supply is typically defined as a collection of safe assets that consumers and companies can use to make payments or invest in short-term.

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?

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

For each of the following assets, indicate which of the monetary aggregates (M1 and M2) includes them:

a. Currency b. Money market mutual funds c. Small-denomination time deposits d. Checkable deposits

Over several hundred years, payments systems used in countries across the world have evolved. For each of the following situations identify the type of payment utilized and at least one reason why economies are moving from checks to electronic payments.

a. Sheila visits a local grocery store to purchase a dozen eggs and a bag of dog food. She uses a €100 note to pay for the goods.

b. Rachael Garcia, a manager at Proxall Pharmacy, used a piece of gold worth $20 to pay for office supplies she needed this month.

c. Edward has just moved to the city to be closer to his office. He was shopping online for some pieces of furniture and he bought a wardrobe and a table lamp. He used a checking account to initiate an automatic bill payment for the items.
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