Are credit cards or debit cards money? Explain your answer.

Credit cards and debit cards are not money. In the general definition, Money is considered as a liquid asset which can easily and quickly be converted for use as cash (Moffat, 2019). In the federal definitions of money, three definitions of money determine what is considered money in an economy. Firstly, money is defined as currency held by the public on the form of demand deposits and deposits against which checks can be drafted. Secondly, money includes the currency in the public hands and any amounts in savings, balances in retail transactions and all time deposits below $100,000. Thirdly, money includes amounts over $100,000 in time deposits, repurchase liabilities by institutions that hold deposits such as banks and change in organizational money funds (Moffat, 2019). Money is also considered as items that are accepted as a medium of exchange generally in that they can be exchanged for goods and services. Money is a unit of account and storage of value whereas credit cards do not store value or provide a unit of account. s

Credit cards do not fall under any of the definitions of money since they let a person borrow money against a credit set limit (Cardwell, 2019). Credit cards thus allow someone to spend money they do not have and are a form of loan leaving the owner of the card with an obligation to pay the crediting company later on when the bill is generated (Moffat, 2019). Debit cards are directly linked to one account, and anything that is charged to the debit card comes from the cash already in the account (Caldwell, 2019). Debit cards fall under the money held by the public in the form of balances held in depository institutions, i.e. banks and thus the cash is easily and quickly available and paid as soon as the debit card owner validates the transaction by entering the pin. With the debit card, the cash is ready for use and the owner does not have any bills or debts to settle but credit cards are debts and thus do not represent a quickly available liquid asset that defines money. However, credit cards and debit cards are a means through which money is transferred as opposed to being neither money themselves since they cannot be exchanged for services or goods and thus are not a medium of exchange.

 “When the Fed makes an open market purchase of government securities, the quantity of money will eventually decrease by a fraction of the initial change in the monetary base.” Is the previous statement correct or incorrect? Explain your answer.

The statement is false. Open market operations are common undertakings by central banks where they buy or sell government securities to control the money supply by shifting the number of bank reserves and interest rates to attain the desired effect. The federal open market committee determines the open market operations that will deliver the desired effect on the monetary base in the economy. The Federal Reserve also identified as the central bank participation in open market and purchasing of government bonds is based on the power vested on the central bank to control the money supply and their power to create money. Open market operations have two major roles they play in the economy. Open market operations can either increase the monetary base in the economy or reduce it, and thus the central bank uses them to control the quantity of money available in the economy. Open market operations include two approaches; open market buying and the open market selling of government treasury securities from the banks and the public (lumen Learning, 2018).

The open market buying approach is implemented when the central bank wants to increase the money supply in the economy, and open market selling is done when the central bank wants to reduce the money supply in the economy. The federal reserve needs to control the bank reserves to control money supply since the money in supply is usually that which is held by the public or by the bank in the form of liquid assets. Therefore, to reduce the monetary base, the central bank needs to reduce the bank reserves and to increase the monetary base it needs to increase the bank reserves. When the Fed makes an open market purchase of government securities, it increases the banking systems reserves and thus increasing the monetary base. The banking system or the public from who the securities are bought losses the bond but gain in an equivalent in the form of the reserves it holds. When the securities are purchased from the banking system the bank loses securities and gains reserves in its account while when the securities are purchased from the public, the public will deposit the cash into the ban increasing the reserves in the bank and thus increasing the monetary base thus the statement is false.

For the Federal Reserve to decrease the monetary base in the economy, it sells treasury bonds from the banking system and the public. When the central bank sells securities to the banking system, it losses reserves but gain securities at the central bank which reduces the monetary base in the economy. Conversely, when the Fed sells securities to the public, the public draws from its bank reserves to make payments and thus reducing bank reserves and money in circulation and holding securities with the central bank.  Basically, when the central bank buys securities from the banks and the public, it pays them in the form of money and thus increasing the monetary base, and when it sells government bonds to the public and the banks, it receives money from the economy thus reducing the monetary base.

Monetary policy is an action taken by the Fed to influence the level of real GDP. Suppose the Fed wants to increase the money supply. What three tools could the Fed use to achieve this goal? Be specific in your answer and discuss the implications of this policy

The Fed is responsible for the monetary policy in an economy, and it takes action with the policy to influence Gross Domestic Product. In the case the Fed wants to increase the money supply in the economy thus influencing the GDP, it can do so through a variety of tools in its monetary policy actions. Some of the tools the Fed can use to increase the money supply in the economy include open market operations, reserve requirements, discount rates and the federal rate (Amadeo, 2018). The open market operations can increase the money supply in the economy through the Fed buying securities from banks and the public in exchange for money. The central bank pays banks and the public money for their securities thus increasing the amount of money in circulation in the economy. The banks receive cash which increases the amount available to give to the public as credit. As a result, the banks lower their interest rates allowing more people to borrow and thus people have more money to spend and the money supply in the economy increases.

A reserve requirement refers to the amount of money that banking institutions hold at hand at any one given time whether at the central bank or in their account balances. The bank is expected to have a certain amount of money in its accounts and with the central bank at any given time which it cannot lend which is the reserve requirement. The central bank determines the level of the reserve that a bank should have at any one point. In order to increase the money supply, the central bank lowers the reserve requirement for the banks both in its reserve and in the banks’ accounts. When the reserve requirement is lowered, banks are able to lend more money to the borrowers and thus increase the money supply in the economy since they have more reserves available for lending (Amadeo, 2018). For instance, if the reserve requirement is lowered from $100, 000 to $70,000 the bank as an extra $30,000 to lend to the borrowers.

Discount rates are another tool the Fed can use to increase the money supply in the economy. The discount rates refer to the charges Fed makes on banks that borrow from it. When the Fed wants to increase the money supply, it will offer a substantial discount to the borrowers to allow them to borrow more so they can lend it to the public and increase the money supply. However, banks rarely borrow from the central banks since they only do so when they can borrow from other banks and any banks using the discount window is considered at a crisis. The central bank also determines the rate at which banks lend money to one another which is referred to as the federal rate. When the Fed wants to increase the money supply, it lowers the federal rates conversely lowering the interest rates and thus allows banks to borrow more from one another and thus increase the amount available for lending.

References

Amadeo, K (2018). Monetary policy tools and how they work. The Balance. Retrieved on 26 March 2019 from https://www.thebalance.com/monetary-policy-tools-how-they-work-3306129

Caldwell, M (2019). What Is the Difference Between Credit Card and a Debit Card? The Balance. Retrieved on 26 March 2019 from https://www.thebalance.com/difference-between-a-credit-card-and-a-debit-card-2385972

Lumen Learning (2018). Monetary Policy and Open Market Operations. Retrieved on 26 March 2019 from https://courses.lumenlearning.com/wm-macroeconomics/chapter/monetary-policy-and-open-market-operations/

Moffatt, Mike. (2019). Are Credit Cards a Form Of Money? ThoughtCo. Retrieved on 26 March 2019 from https://www.thoughtco.com/credit-cards-and-the-money-supply-1146295