If debit cards become more widely used by consumers and businesses, which of the following is most likely to happen?
A) Currency holdings will remain the same, but the M1 money supply will fall.
B) The amount of currency held by the public will increase.
C) Less money will be held as currency and more money will be held in bank accounts, which will increase the reserves of banks unless the Fed takes offsetting actions.
D) The money supply will be unaffected because debit card expenditures are considered the equivalent of cash.

Question

Quizplus · Accepted Answer

If debit cards become more widely used, people will be less likely to hold money in the form of currency and will instead keep it in bank accounts. This will increase the reserves of banks, unless the Fed takes offsetting actions. Therefore, less money will be held as currency and more money will be held in bank accounts, which will increase the reserves of banks. Option A is incorrect because the M1 money supply will fall as money is kept in bank accounts instead of being held as currency. Option B is incorrect because the amount of currency held by the public will decrease. Option D is incorrect because debit card expenditures are not the equivalent of cash, as they involve a transfer of funds from a bank account to a vendor.

If Debit Cards Become More Widely Used by Consumers and Businesses