Question

In 2012, the Lee family had disposable income of

$110,000, wealth of $440,000, and an expected future income of $110,000 a year.At a real interest rate of 4 percent a year, the Lee family saves $20,000 a year; at a real interest rate of 6 percent a year, they save $25,000 a year; and at a real interest rate of 8 percent, they save $30,000 a year.
A) The Lee family's consumption in 2012 was $80,000.
B) The Lee family's consumption in 2012 was $85,000.
C) The Lee family's consumption in 2012 was $90,000.
D) The Lee family's consumption in 2012 was $95,000.

Answer 1

The correct answer is that the Lee family's consumption in 2012 was $90,000. This is determined by subtracting their savings from their disposable income which results in consumption equaling the remainder.

Step-by-step explanation:

The question revolves around the consumption and saving behavior of the Lee family in 2012, given their disposable income and different real interest rates. According to the information provided, the Lee family saves different amounts at different interest rates. Using the Lee family's disposable income of $110,000 and their saving amount, we can calculate their consumption.

For example, at a 4% interest rate, the Lees save $20,000, which means they have consumed the remainder of their income. Therefore:

Consumption = Disposable Income - Savings

Consumption = $110,000 - $20,000

Consumption = $90,000

So, option C) The Lee family's consumption in 2012 was $90,000 is the correct answer. Consumption and savings must always equal total disposable income.