Credit cards are considered part of M1 money supply because they can be used for transactions.

Question

BlackTom AI · Accepted Answer

Question statement: 'Credit cards are considered part of M1 money supply because they can be used for transactions.'

Option 1: True. This is incorrect because M1 includes currency (coins and paper money), checkable (demand) deposits, and other highly liquid forms of money that are immediately spendable. A credit card does not itself provide spendable money; it is a line of credit issued by a bank. When you use a credit card, you are borrowing funds and paying later, so the card does not directly function as money in circulation. Therefore, credit cards are not part of M1.

Option 2: False. This is the correct assessment. The key idea is that credit cards enable purchases by borrowing rather than by possessing immediate funds. The money used to settle a credit card transaction comes from the card issuer or the merchant’s processor after the transaction, and the actual money supply components (like currency and checkable deposits) are separate from the credit line itself. Thus, credit cards are not counted as M1.

Why the other choice fails: The belief that 'credit cards can be used for transactions and thus are money' misunderstands money's definitional criteria. Money must be a readily spendable asset; a credit card advances a loan commitment rather than directly converting assets into purchase power at the moment of payment. Consequently, credit cards do not satisfy the liquidity or immediacy requirements that define M1, which is why the statement is false.

Credit cards are considered part of M1 money supply because they can be used for transactions.

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Credit cards are considered part of M1 money supply because they can be used for transactions.

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