During the millennium 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?

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.75, meaning that for every dollar not spent, $0.75 of spending is lost in the economy. The spending multiplier is 1/(1-MPC) = 1/0.25 = 4. Therefore, a $1,000 reduction in spending leads to a $4,000 decrease in national income.

During the Millennium Scare of 2000, Rufus Reduced His Monthly