To increase tax revenue, the U.S. government in 1932 imposed a 2-cent tax on cheques written on deposits in bank accounts. (In today’s dollars, this tax was about 25 cents per cheque.)
a. How do you think the cheque tax affected the currency–deposit ratio? Explain.
b. Use the model of the money supply under fractional-reserve banking to discuss how this tax affected the money supply.
c. Now use the IS–LM model to discuss the impact of this tax on the economy. Was the cheque tax a good policy to implement in the middle of the Great Depression?