Suppose the Government Spends $3 Million on Highways

question 6

Short Answer

Suppose the government spends $3 million on highways. Some of this money is earned by the highway workers who in turn spend $1,500,000 on food, travel, and entertainment. This causes $750,000 to be spent by the workers in the food, travel, and entertainment industries. This $750,000 causes another $375,000 to be spent; the $375,000 causes another $187,500 to be spent, and so on. (Notice that each expenditure is half the previous one.) Assuming that this process continues forever, how many million dollars in total spending is generated by the original $3 million expenditure?

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Definitions:

Working Capital

The difference between a company’s current assets and current liabilities, indicating its short-term financial health and efficiency.

Current Ratio

A liquidity ratio that measures a company’s ability to pay short-term obligations with its current assets.

Quick Ratio

A financial ratio that measures a company’s ability to meet its short-term obligations with its most liquid assets.

Income Statement

A financial statement that reports a company's revenues, expenses, and profits over a specific period, showing the net income or loss.