Please answer the following questions:

1. Evidence suggests that people tend to spend a higher amount when using electronic transfers (e.g. debit cards) than when using cash. How might the integration of electronic payment technology influence money demand and, ultimately, short term interest rates? Full credit answers will incorporate a money supply and money demand model. (2 pts)
2. The Federal Reserves Survey of Consumer Finances on the use of electronic banking shows that about 90% of households used at least one form of electronic payment in 2004. This is part of a larger trend towards accelerated integration of electronic payment. Assuming the Fed continues to target interest rates, how might this influence monetary policy decision making? How might that influence aggregate demand? (2 pts)
3. What if, instead, the Fed targeted the money supply? What kind of impact, if any, would it have on monetary policy decisions? How might this influence aggregate demand? (2pts)

*Kim and Lee, A Model of Debit Card as a Means of Payment, Journal of Economic Dynamics & Control, 2010

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