Using the cash balance approach with k = 1/2 and GDP equal to $600 billion, cash balances must be equal to
A) $1200 billion.
B) $600 billion.
C) $300 billion.
D) More information is needed to answer this question.

Question

Quizplus · Accepted Answer

The cash balance approach is given by the equation M = kY, where M is the demand for money, Y is GDP, and k is the cash balance ratio (the fraction of income that people want to hold as cash balances).

Here, k = 1/2 and GDP is $600 billion, so the demand for money (cash balances) is:

M = kY = (1/2)($600 billion) = $300 billion

Therefore, the best choice is C, $300 billion.

Using the Cash Balance Approach with K = 1/2 and GDP