During the Y2K scare of 2000, Rufus reduced his monthly spending by $1,000 and buried his money in the backyard. If the marginal propensity to consume is 0.75, by how much did national income fall?
A) $0
B) $1,000
C) $4,000
D) It increased by $4,000.

Question

Quizplus · Accepted Answer

Rufus reducing his spending by $1,000 means that he is saving that $1,000, which he buried in his backyard. The marginal propensity to consume is the proportion of an increase in income that is spent on consumption. If Rufus has a marginal propensity to consume of 0.75, this means he will spend 75% of any additional income he receives.

In this case, by reducing his spending by $1,000, Rufus is reducing the total amount of consumption in the economy by $1,000. Given his marginal propensity to consume, this reduction in consumption will lead to a reduction in income of four times the initial reduction in spending. Therefore the reduction in national income is:

$1,000 x 4 = $4,000

Therefore, the correct answer is (C) $4,000.

During the Y2K Scare of 2000, Rufus Reduced His Monthly