Final answer:
A government tax on credit card services leads to higher interest rates, reducing the demand for credit and the equilibrium quantity of credit. The supply of credit might also decrease, further increasing the price and reducing the quantity. The demand for money and the overall price level could potentially decrease as a consequence.
Step-by-step explanation:
When the government imposes a tax, at rate t, on credit card services, the market for credit will experience a shift in the supply curve, leading to changes in equilibrium. Following the laws of supply and demand, an imposed tax would effectively increase the cost of credit card borrowing. Suppliers might pass on this cost to consumers in the form of higher interest rates, which would function similarly to an increase in the price of borrowing.
As prices go up (higher interest rates), the demand for credit card borrowing will fall, leading to a reduction in the equilibrium quantity of credit card debt. At the same time, higher costs of borrowing may reduce the supply of credit as credit card companies adjust for the tax burden. This reduction in supply further contributes to a higher equilibrium price and a lower equilibrium quantity.
The demand for money, which may be associated with the need for liquidity to make purchases, could decline as the cost of borrowing on credit cards becomes more expensive. With less borrowing, there could be less spending and a lower velocity of money in the economy, potentially affecting the overall price level. If spending declines sufficiently, it could lead to lower price levels due to reduced aggregate demand.