Answer to Question #119248 in Macroeconomics for Anshika Bakrewal

Question

The introduction of ATMs, credit cards and e-wallets have reduced the demand for money at any given level of income and interest rate. Using AS-AD and IS-LM framework:
a) Show how this evolution in the money market has impacted the output, prices and interest rate in the economy in the short-run. Illustrate using a diagram.

Answer 1

The introduction of automatic teller machines (ATM) and e-wallets has greatly reduced the demand for money. It has reduced the holding of money. Most people will carry paperless cash even to pay their bills on petrol stations and even supermarkets. When paying for goods electronically the interest rate may go up due to the interest rate as compared to paying on cash basis. In the short run on aggregate demand and aggregate supply the money demanded will reduce while the supply of money will increase. The aggregate demand for money will shift from AD2 to AD1 while the supply will increase from AS1 to AS2. For instance if the economy is under floating exchange rates the LM curve would shift to the right, income will increase and the exchange rates will fall. The graph below shows the effects of price level and output on IS-LM graph.

1) The graph of IS-LM.