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

Question

BlackTom AI · Accepted Answer

Consider the statement about M1 money supply and credit cards. 
Option 1: True. The claim that credit cards are part of M1 because they can be used for transactions sounds plausible at first glance, but it’s misleading. M1 typically includes physical currency (coins and bills) and demand deposits that are readily spendable for transactions. Credit cards do not themselves constitute money; they are a line of credit. When you use a credit card, you are borrowing from the card issuer and later paying the balance, rather than directly exchanging money you already hold in your checking account. Therefore, credit card transactions do not directly add to the money supply. 
Option 2: False. This correctly reflects how M1 is defined. While credit cards enable transactions, the actual money exchanged is the payment from the card issuer to the merchant at the time of settlement, or the consumer’s funds in a bank account when using a debit card or paying with cash. The key distinction is that credit cards are a credit facility, not money in circulation, so they are not counted as part of M1. 
If we break down the underlying concepts: M1 focuses on highly liquid forms of money available for immediate spending, such as currency and checkable deposits. Since credit cards involve borrowing and future repayment, they do not meet the criterion of being immediately spendable money held by the public. Consequently, the statement is incorrect. 
In summary, the reasoning shows that credit cards enable transactions but do not themselves constitute M1 money, making the claim false.

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

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