Question

Complete the question below that are based on your chapter readings Submit your answers in a Microsoft Word document (no PDF) by 11:00 pm on Sunday of Unit 7 or as directed by your professor 1. Debit cards low an individual to transfer funds directly in a checable account to a merchant without writing a check. How is this different from the way credit cards work? Are either credit cards or debit cards money? Explain 2. How would each of the following affect the demand for money!

Answer 1

Solution 1

Debit Cards are the cards that allow us to withdraw money that is available in our account. Here, the account refers to only savings A/C and current A/C. Thus, we are allowed to withdraw that much money which is our own money received in the form of salary, transfers from the government, profits earned, rent, etc.

It is equivalent to cash in hand as we can use this money whenever we want are where we want to use it. We have the sole right to decide the usage of money either in the form of consumption or investment. Hence we can say that it is similar to a cheque, where were need to write the amount and do the signature. Although this process may take 2-3 days for the transaction to get cleared, through debit card we can immediately withdraw our money. In debit card, we don't require signatures but debit card number, pin number and OTP (One Time Password) in order to ensure safety and make sure that no frauds are made. This is a safer mode and increases the speed of the transaction.

They are different from credit cards. Credit- as the name suggests is the money used by an individual that has been borrowed by someone. Here, the individual is the credit card holder who borrows money from the respective bank in order to perform transactions. This account reflects two types of funds. The first is the digital fund which allows you to transact directly from one account to another. And, the other one is the Cash limit which is the money which can be withdrawn from any ATM machine. Now the question arises, what makes it different from the debit cards as these two functions are also provided by the latter. In credit cards, we have to pay interest on every penny spent because the money spent does not belong to the individual but is the money borrowed by him. Thus, we can say that on one hand, the amount spent through debit cars depends upon the deposits in the account, and in credit card, the amount spent depends upon the creditworthiness of the cardholder.

Solution 2

(a) A tax on bonds held by the individuals

Tax refers to the amount paid by the individual to the government. This is the percentage of the property, share, bond, salary, profit, etc that one has. Thus if the tax on bond increases then the disposable income of individuals will eventually decrease. As his more share of income is gone for tax. Thus, less disposable income is available to spend. As a result of which there will be a decrease in money demand.

(b) a forecast by central banks that interest rates will rise sharply in the next quarter

The interest rate is the main determinant of demand for money. Higher the interest rate lower is the demand for money. Lower the interest rate higher is the demand for money. This happens because when interest rate rises people realize that spending less today and saving more to spend later will help them to earn more interest and spend more in the future. Hence the forecast will encourage people to save in the urge to earn more interest at the same interest rate making the demand curve for money shift towards the left. Hence lower demand for money is expected by individuals of the economy.