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.
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.)
To find the amount of money invested during the first four months, we need to calculate the cumulative effect of the reinvestment process. Let's break it down step by step:
Month 1 (January):
The factory invests $400,000 into the economy in the form of employee salaries. Since it's the initial investment, we can consider the entire $400,000 as the amount invested in the first month.
Month 2 (February):
During February, the employees reinvest 80% of their salaries into the economy. This means they spend 80% of $400,000, which is $320,000. So, in the second month, an additional $320,000 is invested in the economy.
Month 3 (March):
In March, 80% of what was spent by the employees in February is reinvested in the economy by the merchants. Since $320,000 was spent in February, 80% of $320,000 is $256,000. Thus, during the third month, an additional $256,000 is invested in the economy.
Month 4 (April):
Similar to the previous months, 80% of what was spent in March will be reinvested. So, 80% of $256,000 is $204,800. This means that in the fourth month, an additional $204,800 is invested in the economy.
Therefore, the amount of money invested during the first four months is as follows:
Month 1 (Jan.): $400,000
Month 2 (Feb.): $320,000
Month 3 (Mar.): $256,000
Month 4 (Apr.): $204,800
Please note that these calculations assume a constant reinvestment rate of 80% and no further information about subsequent months.