Suppose that John allocates $10,000 of his disposable income for necessities. Any additional income beyond that is both spent and saved. Assume he has a disposable annual income of $50,000 and an MPC=0.8. Based on this information the amount of money John should save would be:

Question

Quizplus · Accepted Answer

John's MPC (Marginal Propensity to Consume) is 0.8, which means that he will spend 80% of any additional income he receives. Since his necessary expenses are $10,000 per year, he will spend all income up to $10,000 on necessities and anything beyond that will be saved or spent. Therefore, John's total spending will be $10,000 for necessities plus 0.8*(50,000-10,000)=$32,000. This means that John will save $8,000 (50,000-10,000-$32,000), which is option D.

Suppose That John Allocates $10,000 of His Disposable Income for Necessities