Answer to Question #121103 in Macroeconomics for Ruby

Question

the introduction of atm, 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 if this evolution will have any impact on the output, prices and interest rate in the medium-run. Illustrate using a diagram.

Answer 1

The introduction of credit cards ,e wallets and atms have reduced the demand for currency .With the new technology ,most people do not prefer to hold cash in hand for making payments. Therefore, Credit Cards ,atms and ewallets have negatively impacted on currency demand . people have preferred to use alternative payment such as credit card instead of currency for making payments.

The figure above illustrates how alternative means of payments such as credit cards, debit cards have acted as a substitute for paper currency and lead to a shift in money demand from md to md ' in the medium term and thus lower interest rates.

The Increasing use of electronic payments such as the credit card, atmms and e wallets boosts consumption which increases the aggregate demand

and GDP.The increased use of electronic payments makes the economy more efficient as well. Increased usage of electronic funds transfer reduces transac-tion costs and thus improves the flow of 

goods and services. As shown in the figure below ,the aggregate demand increases from AD1 to AD2 as output or GDP also increases from y1 to y2.As all shift in aggregate demand occurs the overal price level also increases.