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To increase tax revenue, the U.S. government imposed a 2-cent tax on checks written on bank account deposits in 1932 (in today's dollars, about 34 cents per check). Complete the following statements on the impact of this tax on the money multiplier and the money supply.

a. The tax on written checks would make people ___________ likely to write checks. Thus, people might start holding more money as__________ . This would____________ the currency-deposit ratio.
b. Under this check tax, the money supply would have:

1. decreased, because the currency-deposit ratio increased, which in turn decreases the money multiplier.
2. increased, because the currency-deposit ratio increased, which in turn decreases the money multiplier.
3. decreased, because the currency-deposit ratio increased, which in turn increases the money multiplier.
4. not changed, because the check tax would not impact the money supply or the money multiplier.
5. increased, because the currency-deposit ratio increased, which in turn increases the money multiplier.

c. Many economists believe that the sharp decline in the__________ in the early 1930s was at least partially responsible for the severity of the Great Depression.

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Answer:

a. The tax on written checks would make people LESS likely to write checks. Thus, people might start holding more money as CASH. This would INCREASE the currency-deposit ratio.

b. Under this check tax, the money supply would have:

  • 1. decreased, because the currency-deposit ratio increased, which in turn decreases the money multiplier.

Banks' ability to create money through fractional lending depends on people depositing money on banks and not holding cash themselves. The less cahs held by the public, the more money deposited in banks, the larger the money multiplier.