Final answer:
An increase in cash usage due to credit card fraud leads to a higher demand for liquidity, causing the LM curve to shift left. This reflects a decrease in money demanded for credit at each interest rate, altering the equilibrium conditions in the financial market for credit cards.
Step-by-step explanation:
The question relates to how an increase in cash usage, due to a wave of credit card fraud, would affect the liquidity preference model and ultimately shift the LM curve. In the liquidity preference model, the x-axis represents real money balances (L), while the y-axis represents the interest rate (i). An increase in cash transactions implies a higher demand for liquidity. As consumers hold more cash, they demand less money in the form of credit or loans.
The immediate effect would be a shift to the left in the LM curve, representing a decrease in money demanded at each interest rate. This shift occurs because the demand for holding money in liquid form (cash) increases, and the demand for credit (money in circulation or loans) drops.
Essentially, the financial market for credit cards, as represented in graphs and tables, would experience a change in equilibrium. The demand for credit card capital at various interest rates would decrease, leading to a lower equilibrium interest rate for borrowers, assuming credit card firms maintain the supply of credit. However, these conditions can lead to a discrepancy between the quantity demanded and quantity supplied, particularly if banks and other financial institutions respond to increased fraud by reducing the supply of credit.