Question

You have received AED 2,500 bonus and your MPS is 0.40. How much your consumption has increased as well as savings? Show the calculation of increased amount of consumption and savings.

Answer 1

To calculate the increased consumption and savings, you need to find the Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS). The increased consumption is equal to the after-tax income multiplied by the MPC, while the increased savings is equal to the after-tax income multiplied by the MPS.

Step-by-step explanation:

Given that you received AED 2,500 bonus and your Marginal Propensity to Save (MPS) is 0.40, we can calculate how much your consumption has increased as well as your savings.

To calculate the increased amount of consumption, we need to find the Marginal Propensity to Consume (MPC), which is equal to 1 - MPS. In this case, MPC = 1 - 0.40 = 0.60.

Next, we multiply the after-tax income by the MPC. So, increased consumption = AED 2,500 x 0.60 = AED 1,500.

To calculate the increased savings, multiply the after-tax income by the MPS. So, increased savings = AED 2,500 x 0.40 = AED 1,000.