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The Hatfields and the McCoys both earn $50,000 per year in real terms in the labor market, and both families are able to earn a 25% real interest rate on their savings. Assume that all interest is paid out as income in the following year. In the year 2010, both families began to save. The Hatfields saved 8% of their income each year; the McCoys saved 10%. In 2010, the Hatfields consumed ______ more than the McCoys; in 2011, the Hatfields consumed ______ than the McCoys.

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Answer:

Consider the following calculations

Explanation:

1. Income in 2000 = $50,000

In 2000

Hatfields save 8% = $50,000*8% =$4,000

McCoys save 10% = $50,000*10% = $5,000

Hatfields consume {[($50,000- $4,000) – ($50,000 - $5,000)] = 1000} i.e. $1000 more than the McCoys

In 2001

25% interest on 4000 = 4000(1+.25) = $5,000

25% interest on 5000 = 5000(1+.25) =$6,250

Total earning for Hatfields = $55,000

Total earning for McCoys =$ 56,250

Hatfields save 8% = $55,000*8% =$4,400

McCoys save 10% = $56,250*10% = $5,625

Hatfields consume { [($55,000- $4,400) – ($56,250- $5,625)] = -25 } i.e. $25 less than the McCoys

1. Income in 2000 = $50,000

In 2010

Hatfields save 8% = $50,000*8% =$4,000

McCoys save 10% = $50,000*10% = $5,000

Hatfields consume {[($50,000- $4,000) – ($50,000 - $5,000)] = 1000} i.e. $1000 more than the McCoys

In 2011

5% interest on 4000 = 4000(1+.05) = $4,200

5% interest on 5000 = 5000(1+.05) =$5,250

Total earning for Hatfields = $54,200

Total earning for McCoys =$ 55,250

Hatfields save 8% = $54,200*8% =$4,336

McCoys save 10% = $55,250*10% = $5,525

Hatfields consume { [($54,200- $4,336) – ($55,250- $5,525)] = 139 } i.e. $139 more than the McCoys