Merchants Stop Taking Cards
The question
In the country of Ardenne, a sharp rise in card-processing fees leads most merchants to stop accepting cards and payment apps, so households and firms must now complete the same purchases with currency and checking balances they keep on hand. Assume the price level, real income, and central bank policy are all unchanged. Show the effect of this change on the money market. Show the effect on the Money Market graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Merchants Stop Taking Cards: the worked answer
On the Money Market graph, Money demand (MD) shifts right.
Why Money demand (MD) shifts right
Money is held to carry out transactions, and when cards and payment apps are no longer accepted, the same volume of purchases requires larger holdings of currency and checking deposits at every interest rate. This is an increase in money demand, so the MD curve shifts to the right. The price level, real income, and central bank policy are all held constant, so nothing changes the fixed quantity of money supplied and the vertical MS line stays put.
What happens to the equilibrium
The equilibrium nominal interest rate rises while the quantity of money is unchanged.
The mistake students make on this one
The specific wrong answer is shifting MS right, on the reasoning that "more currency is circulating now, so there is more money." Not one extra dollar was created; people only want to hold more of the existing stock at each interest rate, and the interest rate must rise until they are content holding exactly the quantity that already exists.
On exam day
The payments-institution determinant cuts both ways: anything that lets people transact with smaller balances shifts MD left, and anything that forces bigger balances for the same purchases shifts MD right, while MS moves only when the central bank acts.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Money demand (MD) shifts right and every other curve on the Money Market graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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