Question

Let's say that in 2019, Mary Jones was employed all year at a job making $61,000 in wages, that is, gross income, and, after $21,000 was "taken out" in various taxes and fees, she was clearing $40,000 per year in net income. Let's say that this is the only source of income for her family. She and her family spent $39,000 and saved the other $1,000. What is her A.P.C.? Is this good for our economy, in your opinion? Or bad? WHY? If she earns a pay raise of $1,000 after taxes, and spends $700 of it, what is her M.P.C.? Is this good for our economy? Or bad? Why? What happens to the other $300?

Answer 1

SOLUTION:-

(i)

* APC = Consumption / Net income = C / Y = 39,000 / 40,000 = 0.75

* Since APC is so high, it means a very high proportion of incme is being spend on consuming goods and services, and too little is being save. Since saving is the source of capital formation which is the driver for economic growth, lower saving hampers economic growth and it is bad for the economy.

(ii)

* MPC = Change in C / Change in Y = 700 / 1000 = 0.7

* A MPC of 0.7 means that most of the additional income is being spent on more goods and services, and less is being saved. Since saving is the the source of capital formation which is the driver for economic growth, lower saving hamper economic growth and it is bad forr the conomy.

(iii)

The other $300 is saved, since income comprises consumption and saving only. So whatever is not spet, will be saved. This is the additional saving out of additional income.