Mrs. Davis was in the habit of keeping $500 in currency in her jewelry chest in case she ever needed cash and the bank was closed. However, she recently got a combination debit/ATM card that gives her access to her checking account 24 hours a day. She deposits her $500 in cash into her checking account.
How does this immediately impact the monetary base and the effective amount money available for transactions?
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A. B. C. D. E. F. G.Explanation
Effectively, there is no difference in how Mrs. Davis is using money, simply a different vehicle for spending it. Therefore the effective level of money in circulation has not changed. However, where the monetary base previously had including her $500 in currency, it would now only include the percentage of this money held in reserve by her bank. The monetary base equals currency plus bank reserves. Therefore the monetary base would decrease.
Innovations like debit cards have decreased the need to hold currency. Therefore certain measures of the money supply may decrease despite no real change in the money level in circulation.