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Chapter 20: Q 9. (page 546)

Some payment technologies require infrastructure (e.g., merchants need to have access to credit card swiping machines). In most developing countries historically this infrastructure has either been nonexistent or very costly. However, recently mobile payment systems have expanded rapidly in developing countries as they have become cheaper. Everything else being equal, would you expect the transaction component of the demand for money to be increasing or decreasing in a developing country relative to a rich country?

Short Answer

Expert verified

In underdeveloped countries, transaction money supply would be higher than in prosperous countries.

Step by step solution

01

Step 1. Define inflation.

Inflation is defined as a broad, gradual increase in the prices of goods or services in quite an economy.

02

Step 2. Explanation

Cash would be used more in underdeveloped countries than in developed countries due to the high expense of infrastructure required to enable new payment methods. As a result, the money supply in transactions in emerging countries would be higher than in developed countries.

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Go to the St. Louis Federal Reserve FRED database, and find data on the M1 Money Stock (M1SL), M1 Money Velocity (M1V), and Real GDP (GDPC1). Convert the M1SL data series to 鈥渜uarterly鈥� using the frequency setting, and for all three series, use the 鈥淧ercent Change from Year Ago鈥� setting for units.

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