Suppose a new \"payment technology\" allows individuals to make payments using U

Question

Suppose a new "payment technology" allows individuals to make payments using U.S. Treasury bonds (i.e., U.S. Treasury bonds are immediately cashed when needed to make a payment and that balance is transferred to the payee). How do you think this payment technology would affect the transactions component of the demand for money?

A.

This would lead to an increased need to hold cash for transactions, thus the transactions demand for money would increase.

B.

This would lead to a decreased need to hold cash for transactions, thus the transactions demand for money would decrease.

C.

This would lead to a decreased need to hold cash for transactions; however, the transactions demand for money would remain unchanged.

D.

This technology would not change the transactions component of the demand for money.

Explanation / Answer

C.

This would lead to a decreased need to hold cash for transactions; however, the transactions demand for money would remain unchanged.

Using bonds will replace using cash as liquidity point of view and safety as well. But the total money transactions will ot be affected with this new change. The impact will be on mainly cash transactions. So the option C.

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