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Anna is a US resident who buys a $3,000 computer using a US issued debit card....

Anna is a US resident who buys a $3,000 computer using a US issued debit card. Would this purchase of $3,000 get added to the money supply? What difference would it make whether the merchant who sold the computer has its bank in the US or overseas?

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Answer #1

Given that Anna is a US resident, she must have her account with a US bank. Now if she buys something with a debit card issued by her US bank, she is actually transferring $3000 from the total deposits in her bank to the total deposits in merchant's bank. In this way M1 stock of money supply remains unaffected.

If the merchant has his bank overseas, then this transaction will reduce the money supply in the US because then nothing will be added in the US bank. Hence it makes a difference when the merchant has checking account in a foreign bank.

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