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.

$1000,$139

Explanation:

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

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