Macroeconomics

How Do Credit Cards and Debit Cards Fit 

Into the Monetary System?

account to pay for items bought. Rather than

allowing users to postpone payment for their

purchases, a debit card allows users immediate

access to deposits in their bank accounts. Using

a debit card is similar to writing a check. The

account balances that lie behind debit cards are

included in measures of the quantity of money.

Even though credit cards are not a form of

money, they are still important for analyzing the

monetary system. Because people with credit

cards can pay many of their bills all at once at the

end of the month, rather than sporadically as

they make purchases, they may hold less money

on average than people without credit cards.

Thus, the increased popularity of credit cards

may reduce the amount of money that people

choose to hold. In other words, credit cards are

not part of the supply of money, but they may

affect the demand for money.

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of the money stock that the Federal Reserve calculates for the U.S. economy,

together with a list of which assets are included in each measure. From the small-

est to the largest, they are designated C, M1, and M 2. The Fed used to calculate

another, even more extensive measure called M 3 but discontinued it in March

2006. The most common measures for studying the effects of money on the

economy are M1 and M 2.