When you spend $1 at the grocery store, the store doesn’t keep all of your money as profit. Some of it is reinvested in the economy when the grocery store buys more merchandise from suppliers. In turn, the suppliers don’t keep all of that money as profit, either; they reinvest it in the economy when they buy more raw materials from other suppliers. The end result is that your $1 may have a larger effect on the economy. Consider the following situation.

Question

When you spend $1 at the grocery store, the store doesn’t keep all of your money as profit. Some of it is reinvested in the economy when the grocery store buys more merchandise from suppliers. In turn, the suppliers don’t keep all of that money as profit, either; they reinvest it in the economy when they buy more raw materials from other suppliers. The end result is that your $1 may have a larger effect on the economy. Consider the following situation.

In January, a factory invests $400,000 into the economy in the form of employee salaries. During February, assume that the employees reinvest in the economy by spending 80% of their salaries. Then, during March, 80% of what was spent by the employees is again reinvested in the economy by the merchants. And so on.

Part A: Find the amount of money that is invested during the first four months. ______________ ______________ ______________ ______________ Month 1 (Jan.) Month 2 (Feb.) Month 3 (Mar.) Month 4 (Apr.)

Answer 1

To find the amount of money that is invested during the first four months, we need to calculate the reinvestment for each month.

In January, the factory invests $400,000 in the form of employee salaries. This is the initial investment.

In February, assuming that the employees reinvest 80% of their salaries, the reinvestment can be calculated as follows:

Reinvestment in February = 80% of salaries in January
= 80% * $400,000

In March, assuming that merchants reinvest 80% of what was spent by the employees in February, the reinvestment can be calculated as follows:

Reinvestment in March = 80% of what was spent in February
= 80% * (80% * $400,000)

In April, assuming the same reinvestment rate of 80%, we can calculate the reinvestment as follows:

Reinvestment in April = 80% of what was spent in March
= 80% * (80% * (80% * $400,000))

Putting it all together:

Month 1 (Jan.): $400,000 (initial investment)
Month 2 (Feb.): 80% * $400,000
Month 3 (Mar.): 80% * (80% * $400,000)
Month 4 (Apr.): 80% * (80% * (80% * $400,000))

Now you can calculate the amounts for each month.