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 percent 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 percent of their income each year; the McCoys saved 10 percent. In 2010, the Hatfields consumed ________ more than the McCoys; in 2011, the Hatfields consumed ________ than the McCoys.
A)$1,000; about $800 more
B)$2,000; about $250 more
C)$1,000; about $800 less
D)$2,000; about $250 less

Question

Quizplus · Accepted Answer

In 2010, the Hatfields consumed $50,000 × 0.92 = $46,000, whereas the McCoys consumed $50,000 × 0.9 = $45,000. The Hatfields consumed $1,000 more. In 2011, the Hatfields' income from labor and interest was $50,000 + ($4,000 × 0.25)= $51,000, and their consumption was $51,000 × 0.92 = $46,920. The McCoys' income from labor and interest was $50,000 + ($5,000 × 0.25)= $51,250, and their consumption was $51,250 × 0.9 = $46,125, or $795 less than the Hatfields. While the McCoys still consume less than the Hatfields in 2011, the gap is shrinking between the first and second year.

The Hatfields and the McCoys Both Earn $50,000 Per Year