When taxes paid by a check are deposited in tax and loan accounts,
A) bank reserves and the money supply are unaffected.
B) bank reserves fall but the money supply is unaffected.
C) bank reserves are unaffected but the money supply falls.
D) bank reserves and the money supply fall.

Question

Quizplus · Accepted Answer

When taxes paid by a check are deposited in tax and loan accounts, the bank reserves are unaffected because they are kept in the same bank where the check was deposited. However, the money supply falls because the deposit of the check reduces the amount of money in circulation. This is because the money represented by the check is no longer available for spending until it is withdrawn from the tax and loan accounts.

When Taxes Paid by a Check Are Deposited in Tax