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he U.S. government in 1932 imposed a 2-cent tax on cheques written on deposits in in...

he U.S. government in 1932 imposed a 2-cent tax on cheques written on deposits in in bank accounts to increase tax revenue. In today’ dollars, this tax was about 25 cents per cheque. 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?

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The cheque tax on bank account deposits will act as a disincentive to save, decreasing savings. s a result, IS curve will shift leftward, decreasing both real interest rate and output. In vie of Great Depression, this was a bad policy tool because lower savings decreased capital formation which further weakened economic growth.

In following graph, real interest rate (r) and output (Y) are measured vertically and horizontally respectively. IS0 & LM0 are initial IS & LM curves intersecting at point A with initial interest rate r0 and output Y0. As IS0 shifts left to IS1, it intersects LM0 at point B with lower interest rate r1 and lower output Y1.

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