Question

Credit card balances are included in which of the following?

1) Assets
2) Liabilities
3) Equity
4) Expenses

Answer 1

Credit card balances are considered liabilities as they constitute money owed. Monetary aggregates classify line of credit as neither M1 nor M2, traveler's checks and checking account funds as M1, and money in a money market account as M2. Bank assets may not be present due to fractional-reserve banking, and the value of loans in the secondary market is influenced by payment reliability and interest rate fluctuations.

Step-by-step explanation:

Credit Card Balances and Monetary Aggregates M1 and M2

Credit card balances are included in liabilities. This is because they represent money that you owe to the credit card company. As for determining the classification within monetary aggregates:

• Your $5,000 line of credit on your Bank of America card is neither M1 nor M2 as it represents potential borrowing, not actual money.
• $50 dollars' worth of traveler's checks you have not used yet would be part of M1, as traveler's checks are considered a part of the liquid money supply.
• $1 in quarters in your pocket falls into M1 since it's physical currency in circulation.
• $1200 in your checking account is also included in M1 because money in checking accounts is liquid and can be used for transactions immediately.
• $2000 you have in a money market account would be part of M2. M2 includes M1 plus savings deposits, time deposits under $100,000, and non-institutional money market funds.

When considering a bank's balance sheet, the money listed under assets may not actually be in the bank due to the practice of fractional-reserve banking, where banks keep only a fraction of their deposits on hand and lend out the remainder.

In the secondary loan market, one would be willing to pay:

1. Less for a loan if the borrower has been late on payments due to higher risk.
2. Less if interest rates have risen since the loan was made, as the fixed loan would be at lower rate compared to the market.
3. More for a loan if the borrower is financially healthy - such as a firm declaring high profits - indicating lower risk.
4. More if interest rates have fallen since the loan was issued, as it means the loan's rate is higher than current market rates.