Until you pay the credit card bill, you have effectively borrowed money from the credit card company. With a smart card , you can store a certain value of money on the card and then use the card to make purchases. In short, credit cards, debit cards, and smart cards are different ways to move money when you make a purchase. However, having more credit cards or debit cards does not change the quantity of money in the economy, any more than printing more checks increases the amount of money in your checking account.
One key message underlying this discussion of M1 and M2 is that money in a modern economy is not just paper bills and coins. Instead, money is closely linked to bank accounts.
The banking system largely conducts macroeconomic policies concerning money. Read a brief article on the current monetary challenges in Sweden. We measure money with several definitions: M1 includes currency and money in checking accounts demand deposits.
M2 includes all of M1, plus savings deposits, time deposits like certificates of deposit, and money market funds. If you are out shopping for clothes and books, what is easiest and most convenient for you to spend: M1 or M2? Explain your answer. The currency and checks in M1 are easiest to spend. It is harder to spend M2 directly, although if there is an automatic teller machine in the shopping mall, you can turn M2 from your savings account into an M1 of currency quite quickly.
The total amount of U. When you make a purchase with a credit card, the credit card company immediately transfers money from its checking account to the seller, and at the end of the month, the credit card company sends you a bill for what you have charged that month.
Until you pay the credit card bill, you have effectively borrowed money from the credit card company. With a smart card , you can store a certain value of money on the card and then use the card to make purchases. In short, credit cards, debit cards, and smart cards are different ways to move money when a purchase is made. But having more credit cards or debit cards does not change the quantity of money in the economy, any more than having more checks printed increases the amount of money in your checking account.
One key message underlying this discussion of M1 and M2 is that money in a modern economy is not just paper bills and coins; instead, money is closely linked to bank accounts. Indeed, the macroeconomic policies concerning money are largely conducted through the banking system. Read a brief article on the current monetary challenges in Sweden.
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We Are Hiring. Trading Economics welcomes candidates from around the world. Current job openings:. So this is a security right over here. And the person that they bought the security from decides to deposit it in a bank.
They could either directly deposit it in a bank or they could use that money that they got from selling their security to buy things, and the person they bought things from could deposit it in a bank.
But one way or another we can imagine it all gets deposited in a bank. So this is our private bank. I'll call this private bank number one. So now all of these dollars are transferred to private bank number one. And they are no longer-- the Federal Reserve, or the Central Bank, in the general case, is no longer in possession of them.
They've been transferred right over here. And I want to cross these out just so we can keep track of things. Now when they deposit it in private bank number one, they said, well, I need three of these dollars on demand. And I want to write checks against them. So they put three of these dollars in a checking account.
There are at three of these dollars a checking account. And they cannot write checks against that savings account. Now there are special circumstances now, but for simplicity, let's just say that they cannot write checks.
There are some that have restricted check writing and things like that now. So this bank says, OK, well, this dollar, I don't have to even have any reserves against it. I could loan out this dollar. And the person they lend it to, let's say that they immediately go and deposit it into another bank. So they immediately go and deposit this in private bank, I'll call this private bank two. So it's no longer in private bank one.
Let me draw a private bank two. Private bank two is a right over here. Private bank number two. And they deposit it into a savings account in private bank number two. And let's say all of this, out of all of this, the bank says, well, this is a demand deposit, I have to keep some reserves. This is a fractional reserve system.
So these two also end up in private bank number two.
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