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?
A) $1,000
B) 0
C) $4,000
D) It actually increased $4,000.

Question

Quizplus · Accepted Answer

If Rufus reduced his monthly spending by $1,000, it implies that he saved $1,000. If his marginal propensity to consume is 0.75, it means that he used 25% of his savings to purchase goods and services. Therefore, the total amount of spending that was lost from the economy is:
$1,000 x 0.25 = $250
However, since every dollar spent becomes someone else's income, the total loss of income to the economy is:
$250 / 0.25 = $1,000
Therefore, national income fell by $1,000 x 4 = $4,000.

During the Millennium Scare of 2000,Rufus Reduced His Monthly Spending