The Demand for Credit Card Services The quantity of goods that consumers firms

The demand for credit card services the quantity of

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The Demand for Credit Card Services The quantity of goods that consumers, firms or government purchasing agents wish to purchase with credit cards is denoted by X d (q) and can thus be seen as the demand for credit card services. Therefore, Y – X d (q) can be seen as the quantity of goods purchased with currency. In order to
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determine the equilibrium quantity and price of credit card services, we need to determine what X d (q) looks like given the supply curve for credit card services in the above figure. Suppose that an economic agent considers buying one more unit of goods with credit, and one less unit of goods with currency. The economic agent would need to hold ? fewer units of currency to make transactions during current period, and this quantity can be lent on credit market, yielding ? (1 + 𝑅) units of money at beginning of future period. However, the consumer must to give up ? (1 + ? ) units of money at end of period in order to pay off credit card debt and pay the bank for using its credit card services. If (1 + 𝑅 ) > ? (1 + ? ) or R > q , then marginal benefit is greater than marginal cost, and the economic agent will purchase all goods with a credit card. If (1 + 𝑅 ) < (1 + ? ) or R < q, then marginal benefit is less than marginal cost, and the economic agent will purchase all goods with currency. If 𝑅 = ? , then the agent is indifferent between using currency and credit cards. The demand curve is perfectly elastic at 𝑅 = ? , and the equilibrium price for credit card services is therefore 𝑅 and equilibrium quantity is 𝑋∗ The Effects of an Increase in the Nominal Interest Rate on the Market fro Credit Card Services In this figure, an increase in the nominal interest rate from R 1 to R 2 shifts the demand curve fro credit balances up from X d 1 to X d 2 . The equilibirum price of credit card balances increases from R 1 to R 2 and the equilibrium quantity increases from X * 1 to X * 2 .
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If the nomical interest rte rises from R 1 to R 2 , in equilibirum the price of credit card services rises, and the quantity of credit card services rises from X * 1 to X * 2. Therefore we can see that the equilibirum quantity of credit card services rises when the nominal interest rate rises. Effectively, this occurs because the opportunity cost of making a trabsaction with currency in higher the larger the nominal interest rate. This implies that the quantity of goods purchased with currency is Y – X* (R) when the market fro credit card services isin equilibirum, which means that the nminal quantity of currency that consumers, forms and the governmnet want to hold to make transactions is M d = PL(Y, R) . M d = P[Y- X* (R)] can be simplified to M d = PL(Y, R) Here, the function L is increasing in real income, Y , and decreasing in the nominal interest rate, R . The increasing real income implies that more currency required as volume of transactions increase. The decreasing in the nominal interest rate implies that the nominal interest rate is the opportunity cost of using currency in transactions and therefore a higher R implies a greater use of credit in transactions, and less use of currency.
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