Question

Assume that Jane’s marginal propensity to consume equals 0.8, and that in 2004 Jane spent $36,000 from her disposable income of $40,000. If her disposable income in 2005 increased to $50,000, her consumption spending increased by:

A) $4,000
B) $6,000
C) $8,000
D) $10,000

Answer 1

Jane's consumption spending increased by $8,000.

Step-by-step explanation:

To calculate the increase in consumption spending, we need to multiply the increase in disposable income by the marginal propensity to consume (MPC). The MPC is given as 0.8, which means that for every additional dollar of disposable income, Jane will spend 80 cents. In this case, the increase in disposable income from 2004 to 2005 is $50,000 - $40,000 = $10,000. So the increase in consumption spending will be $10,000 * 0.8 = $8,000. Therefore, Jane's consumption spending increased by $8,000.