In 1932, the U.S. government imposed a two-cent tax on checks written on deposits in bank accounts. This action would be expected to ______ the currency-deposit ratio and ______ the money supply.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

The tax on checks would discourage people from writing checks, leading to an increase in the currency-deposit ratio as people hold more currency relative to deposits. This, in turn, would decrease the money supply since the banking system would have fewer deposits to use as a basis for creating additional money through loans.