A smart card, also known as an electronic purse, is a plastic card that can be l

Question

A smart card, also known as an electronic purse, is a plastic card that can be loaded with a monetary value. Its developers argue that, once widely accepted, it could replace the use of currency in vending machines, parking meters, and elsewhere. Suppose smart cards came into widespread use. Present your views on the following issues: a.Would you count balances in the purses as part of the money supply? If so, would they be part of M1? M2? b.Should any institution be permitted to issue them, or should they be restricted to banks? c.Should the issuers be subject to reserve requirements? d.Suppose they were issued by banks. How do you think the use of such purses would affect the money supply? Explain your answer carefully. Need answer to C and D

Explanation / Answer

C. I think issuer need not be subject to reserve requirements as these smart cards are loaded with the same value deposited in it. The issuers issues these cards with the same amount of money deposited in them. These cards only have the amount of money which is deposited in them, therefore there is no need of reserve requirement.

D. These cards will affect money supply, because part of cash and demand deposit will convert to smart cards. Since these purses have same value as the amount of money loaded on them, the value of these purses will not exceed the total money supply in the economy.

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