A bank with $200 million in transaction deposits keeps $20 million in cash in th

Question

A bank with $200 million in transaction deposits keeps $20 million in cash in the bank vault, $10 million in deposits at the Fed, and $5 million in government securities in the bank vault. Its total reserves equal According to the above table, if real Gross Domestic Product (GDP) equals $30,000, what is the average propensity to consume? Say's law explains how long-run real Gross Domestic Product (GDP) stability is achieved in the Keynesian model. how long-term real Gross Domestic Product (GDP) stability is achieved in the classical model. why economics experience business cycles. how the economy can go into recession.

Explanation / Answer

(18) (A)

Total reserves = Cash in bank vault + Deposits at Fed = $(20 + 10) million = $30 million

(19) (A)

Average propensity to consume = Consumption / Real GDP = $26,000 / $30,000 = 0.87

(20) (B)

Says law states that long run stability of GDP is achieved in Classical model when supply creates its own demand.

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