Question 1

Which of the following is correct?

Accepted Answer

Studies have shown that incomes tend to peak at around age 50, and then gradually decline. Option A is incorrect because incomes for young workers are generally low due to lack of experience and seniority. Option B is also incorrect because retirement leads to a decrease in income. Option D is also incorrect because research has shown that there is less income equality in current income as compared to permanent income.

Question 2

Susan won $2,000 at the blackjack tables on her birthday. Her winnings are an example of

Accepted Answer

Susan's winnings represent a one-time, unpredictable source of income, making them an example of transitory income. Permanent income refers to a stable, ongoing source of income, while life-cycle income refers to the pattern of earning and saving over an individual's lifetime. In-kind transfers involve receiving goods or services instead of cash.

Question 3

The life cycle effect characterizes a lifetime income profile in which income

Accepted Answer

The life cycle effect refers to the fact that income tends to rise as a worker gains maturity and experience. This is because workers typically start with lower-paying entry-level jobs and gradually move up to higher-paying positions as they gain skills and experience. Income may also increase due to promotions, salary increases, and other factors that come with seniority.

Question 4

Suppose that a family saves and borrows to buffer itself against changes in income. These actions relate to which problem in measuring inequality?

Accepted Answer

This relates to the problem of distinguishing between temporary and permanent changes in income when measuring inequality. Saving and borrowing can reflect temporary changes in income, and therefore highlight the importance of considering transitory versus permanent income when analyzing inequality.

Question 5

Which of the following statements is not correct?

Accepted Answer

The economic life cycle theory explains how individuals plan their consumption and savings over their lifetime, not specifically about gifts reducing poverty for the young and old.

Question 6

Suppose that Angelo and Sonia each win $500 in a charity raffle. Angelo spends his winnings on a new ipad. Sonia saves her winnings. Which of the following is correct?

Accepted Answer

Angelo's behavior suggests that he is making a one-time purchase with his raffle winnings, indicating that he bases his purchasing decisions on transitory income rather than permanent income. On the other hand, Sonia is saving her raffle winnings, suggesting that she is basing her purchasing decisions on her long-term income prospects rather than short-term fluctuations in income, indicating that she bases her purchasing decisions on permanent income.

Question 7

A family's ability to buy goods and services depends largely on its

Accepted Answer

Permanent income refers to a family's normal, or average, income over time. This is the income that is typically used to determine a family's ability to purchase goods and services. Transitory income, on the other hand, refers to income that is temporary or fluctuates, such as bonuses or overtime pay, and is generally not factored into a family's long-term purchasing power.

Question 8

An example of a transitory change in income is the

Accepted Answer

A transitory change in income refers to a temporary or short-term increase or decrease in income that is not expected to last. Option A refers to an annual adjustment that is expected and planned for, while Option B is a more permanent change linked to education and career advancement. Option C, however, is an unexpected event that affects the supply and demand of oranges and leads to a temporary increase in income for California growers. Therefore, Option C is the best choice for a transitory change in income.

Question 9

Which of the following statements is correct?

Accepted Answer

Permanent incomes, which average out the fluctuations in annual income over time, tend to be more equally distributed than annual incomes. This is because temporary changes in income, such as bonuses or temporary unemployment, can cause significant variations in annual income but have less effect on the long-term average income of an individual.

Question 10

Suppose that young people often borrow and then repay the loans when they are older. These actions relate to which problem in measuring inequality?

Accepted Answer

The economic life cycle refers to the pattern of borrowing and saving that individuals typically follow over their lifetime, borrowing when young and repaying when older, which can affect measures of inequality.

Question 11

The Callaway family owns a small bait and tackle shop in a resort town in Wisconsin. An economic recession reduces the number of tourists for one summer, which reduces the family's income for that year. For the Callaway family, their

Accepted Answer

The Callaway family's permanent income likely exceeds their transitory income because the recession is a temporary event that will not permanently affect their income. In the long-term, the bait and tackle shop will likely continue to generate income, and the family's permanent income will not be greatly affected by the one summer of reduced tourism.

Question 12

For a typical worker, her income will be lower when she is younger, peak around age 50, and decrease drastically when she retires. This pattern of changes in income for a typical worker is called

Accepted Answer

The pattern of changes in income for a typical worker, as described in the question, is known as the life cycle. This reflects the fact that workers tend to earn less when they start their careers, reach their peak earning potential in middle age, and then experience a decline in income after retirement. This pattern is influenced by a variety of factors, including education, work experience, and shifting labor market conditions over time.

Question 13

The Hicks family owns a blueberry farm in Maine. The Ward family owns a blueberry farm in Massachusetts. A drought in Massachusetts destroys half of the Ward family's harvest for one year. For the Ward family, their

Accepted Answer

The Ward family's harvest loss due to the drought is a transitory shock to their income. While it may have a significant impact on their income for that year, it is not a permanent change to their income. Therefore, their permanent income, which is their average income over time, is likely to be higher than their income in the year of the drought. The question does not provide enough information to determine how the income of the Hicks family will be affected.

Question 14

A family's ability to buy goods and services depends largely on the family's

Accepted Answer

Permanent income, also known as long-term average income, refers to the income that a family can reliably expect to earn over time. This is a better indicator of a family's ability to buy goods and services than transitory income, which may vary from one month to the next and is less predictable. Economic mobility and the family's place in the economic life cycle may also have an impact but are not as critical as the family's permanent income.

Question 15

The typical economic life cycle illustrates how people tend to

Accepted Answer

The typical economic life cycle shows that people borrow more when they are younger because they are establishing themselves in their careers and may have more expenses such as buying a house or starting a family. As they age, they tend to save more as they may have more stable income and are preparing for retirement. While earning income prior to retirement is commonly referred to as peak earnings, it may vary based on the individual's profession or career path. The concept of adjusting consumption based on changes in transitory income is not directly related to the economic life cycle.

Question 16

Because people can borrow when they are young, the life cycle theory would suggest that one's standard of living depends on

Accepted Answer

The life cycle theory suggests that people can borrow when they are young and repay later in life when their income is higher. Therefore, one's standard of living is dependent on their lifetime income rather than their annual income.

Question 17

The Smith family owns an apple orchard in Illinois. The Jones family owns an apple orchard in Wisconsin. A late frost destroys half of the Smith family's harvest for one year. For the Jones family, their

Accepted Answer

The answer of The Smith family owns an apple orchard...

Question 18

A typical worker's normal or average income is called

Accepted Answer

Permanent income refers to a person's normal or average income over an extended period of time, taking into account fluctuations in earning. It is seen as a better measure of a person's economic well-being compared to transitory income which can be affected by temporary factors such as changes in employment or seasonal fluctuations. The other options, life cycle and in-kind transfers, are not directly related to a typical worker's income.

Question 19

Suppose that Family A borrows money when its car breaks down and saves money when the wife receives a holiday bonus from her employer. Suppose that Family B borrows money to buy elaborate birthday presents for the children and spends the husband's holiday bonus on a vacation to Florida. Which of the following is correct?

Accepted Answer

Family A saves the holiday bonus, indicating they consider it transitory and not part of their regular income. Family B spends the bonus and borrows for non-essential items, indicating they treat these as part of their regular income, or permanent income.

Question 20

Saving and borrowing is indicative of a family that

Accepted Answer

Families that save and borrow are likely adjusting their standard of living to reflect transitory changes in income, indicating that they are proactive in managing their finances and ensuring their long-term financial stability. This behavior is not necessarily indicative of being poor or having a difficult time balancing their standard of living, nor does it automatically make them millionaires.

Quiz 20: Income Inequality and Poverty