Question 1

In the text, the population is divided into _____ groups based on income, and each group is called _____ when data on the distribution of income in a country are presented.

Accepted Answer

The population is divided into five groups based on income, and each group is called a quintile when data on the distribution of income in a country are presented. Therefore, option B is the correct answer. Options A, C, and D are incorrect because they do not describe the correct terminology used for income grouping.

Question 2

Assume that a country with total income of $160,000 has a population of 10 households whose incomes are listed in Table: Income of Households.
What percentage of income is earned by the top quintile of the population?
$$\begin{array}{l}
\text { Table: Income of Households }\
\begin{array} { | l | l | l | } 
\hline \text { Household } & \begin{array} { l } 
\text { Household's } \
\text { income }
\end{array} & \begin{array} { l } 
\text { Household's } \
\text { percent of total } \
\text { income (rounded) }
\end{array} \
\hline 1 & \$ 2,000 & 1 \% \
\hline 2 & \$ 2,000 & 1 \% \
\hline 3 & \$ 2,000 & 1 \% \
\hline 4 & \$ 4,000 & 3 \% \
\hline 5 & \$ 5,000 & 3 \% \
\hline 6 & \$ 5,000 & 3 \% \
\hline 7 & \$ 10,000 & 6 \% \
\hline 8 & \$ 20,000 & 13 \% \
\hline 9 & \$ 40,000 & 25 \% \
\hline 10 & \$ 70,000 & 44 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

The top quintile (20%) of the population in this case refers to the top 2 households (since 20% of 10 households is 2). According to the table, household 9 has 25% of the total income and household 10 has 44% of the total income. Adding these percentages together gives 25% + 44% = 69%.

Question 3

Assume that a country with total income of $160,000 has a population of 10 households whose incomes are listed in Table: Income of Households.
What percentage of income is earned by the bottom quintile of the population?
$$\begin{array}{l}
\text { Table: Income of Households }\
\begin{array} { | l | l | l | } 
\hline \text { Household } & \begin{array} { l } 
\text { Household's } \
\text { income }
\end{array} & \begin{array} { l } 
\text { Household's } \
\text { percent of total } \
\text { income (rounded) }
\end{array} \
\hline 1 & \$ 2,000 & 1 \% \
\hline 2 & \$ 2,000 & 1 \% \
\hline 3 & \$ 2,000 & 1 \% \
\hline 4 & \$ 4,000 & 3 \% \
\hline 5 & \$ 5,000 & 3 \% \
\hline 6 & \$ 5,000 & 3 \% \
\hline 7 & \$ 10,000 & 6 \% \
\hline 8 & \$ 20,000 & 13 \% \
\hline 9 & \$ 40,000 & 25 \% \
\hline 10 & \$ 70,000 & 44 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

D

Question 4

Table: Income Distribution in Four Countries provides recent data from the World Bank on the distribution of income in four countries.
Based on the data, the country with the most unequal distribution of income is:
$$\begin{array}{l}
\text { Table: Income Distribution in Four Countries }\
\begin{array} { | l | l | l | l | l | } 
\hline & \text { Bangladesh } & \text { El Salvador } & \text { Mexico } & \text { Costa Rica } \
\hline \begin{array} { l } 
\text { Percent income top } \
\text { quintile }
\end{array} & 41.4 \% & 46.4 \% & 50.1 \% & 54.0 \% \
\hline \begin{array} { l } 
\text { Percent income } \
\text { middle three quintiles } \
\text { combined }
\end{array} & 50.0 \% & 47.7 \% & 44.2 \% & 41.8 \% \
\hline \begin{array} { l } 
\text { Percent income } \
\text { bottom quintile }
\end{array} & 8.6 \% & 5.9 \% & 5.7 \% & 4.2 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

Costa Rica has the highest percent income for the top quintile (54.0%) and the lowest for the bottom quintile (4.2%), indicating the most unequal distribution of income.

Question 5

Table: Income Distribution in Four Countries provides recent data from the World Bank on the distribution of income in four countries.
Based on the data, the country with the distribution of income that is closest to equal is:
$$\begin{array}{l}
\text { Table: Income Distribution in Four Countries }\
\begin{array} { | l | l | l | l | l | } 
\hline & \text { Bangladesh } & \text { El Salvador } & \text { Mexico } & \text { Costa Rica } \
\hline \begin{array} { l } 
\text { Percent income top } \
\text { quintile }
\end{array} & 41.4 \% & 46.4 \% & 50.1 \% & 54.0 \% \
\hline \begin{array} { l } 
\text { Percent income } \
\text { middle three quintiles } \
\text { combined }
\end{array} & 50.0 \% & 47.7 \% & 44.2 \% & 41.8 \% \
\hline \begin{array} { l } 
\text { Percent income } \
\text { bottom quintile }
\end{array} & 8.6 \% & 5.9 \% & 5.7 \% & 4.2 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

Bangladesh has the lowest percentage of income held by the top quintile and the highest percentage of income for the bottom quintile, indicating the most equal distribution among the options.

Question 6

Data on the distribution of income for the United States show that from 1970 through 2014, the share of income earned by the top quintile _____, and the share earned by the bottom quintile _____.

Accepted Answer

According to data, from 1970 through 2014, the share of income earned by the top quintile rose while the share earned by the bottom quintile fell. Therefore, the correct choice is B.

Question 7

Data from the World Bank for the top and bottom quintiles of the distribution of income in Costa Rica for two years are presented in Table: Costa Rica Income Distribution, Top and Bottom Quintiles.
Which of the following statements is correct for the time period based on the data in the table?
$${ \text { Table: Costa Rica Income Distribution, Top and Bottom Quintiles } } \
\begin{array} { | l | l | l | } 
\hline \text { Year } & \begin{array} { l } 
\text { Percent of income earned } \
\text { by the top quintile }
\end{array} & \begin{array} { l } 
\text { Percent of income earned by } \
\text { the bottom quintile }
\end{array} \
\hline 1986 & 39.6 \% & 5.2 \% \
\hline 2016 & 54 \% & 4.2 \% \
\hline
\end{array}$$

Accepted Answer

The data shows that the top quintile's share of income increased from 39.6% to 54%, while the bottom quintile's share decreased from 5.2% to 4.2%, indicating that the distribution of income has become more unequal.

Question 8

Data from the World Bank for the top and bottom quintiles of the distribution of income in Costa Rica for two years are presented in Table: Costa Rica Income Distribution, Top and Bottom Quintiles.
Which of the following claims CANNOT be made conclusively for the time period based on the data in the table?
$${ \text { Table: Costa Rica Income Distribution, Top and Bottom Quintiles } } \
\begin{array} { | l | l | l | } 
\hline \text { Year } & \begin{array} { l } 
\text { Percent of income earned } \
\text { by the top quintile }
\end{array} & \begin{array} { l } 
\text { Percent of income earned by } \
\text { the bottom quintile }
\end{array} \
\hline 1986 & 39.6 \% & 5.2 \% \
\hline 2016 & 54 \% & 4.2 \% \
\hline
\end{array}$$

Accepted Answer

The table provides data on the distribution of income between the top and bottom quintiles, showing the percentage of income earned by each group in 1986 and 2016. It does not provide information on the actual average income levels or how they changed over time, making it impossible to conclusively claim that the average income in the bottom quintile was lower in 2016 than in 1986.

Question 9

Recent data from the World Bank for the distribution of income and average income in Sri Lanka and Mongolia are presented in Table: Distribution of Income and Average Income for Sri Lanka and Mongolia.
Based on the data in the table, which of the following statements is correct?
$$\begin{array}{l}
\text { Table: Distribution of Income and Average Income for Sri Lanka and Mongolia }\
\begin{array} { | l | l | l | } 
\hline & \text { Sri Lanka } & \text { Mongolia } \
\hline \text { Average household income } & \$ 3,000 & \$ 3,000 \
\hline \begin{array} { l } 
\text { Percent of total income } \
\text { earned by the top quintile of } \
\text { households }
\end{array} & 47.6 \% & 40.6 \% \
\hline \begin{array} { l } 
\text { Percent of total income } \
\text { earned by the bottom quintile } \
\text { of households }
\end{array} & 7.0 \% & 8.0 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

The data shows that the bottom quintile of households in Sri Lanka earns 7.0% of the total income, while in Mongolia, the bottom quintile earns 8.0%. This indicates that the average income for the bottom quintile is lower in Sri Lanka than in Mongolia, as a higher percentage of total income for the bottom quintile in Mongolia suggests they have a relatively higher income compared to their counterparts in Sri Lanka.

Question 10

Table: Average Income and Distribution of Income Data provides recent data from the World Bank on average income and the distribution of income in four countries.
Based on the data in the table, those in the bottom quintile have the lowest average income in which country?
$$\begin{array}{l}
\text { Table: Average Income and Distribution of Income Data }\
\begin{array} { | l | l | l | l | l | } 
\hline & \text { Bangladesh } & \text { Uganda } & \text { Sri Lanka } & \text { Mongolia } \
\hline \begin{array} { l } 
\text { Average household } \
\text { income in the nation }
\end{array} & \$ 1,000 & \$ 1,000 & \$ 3,000 & \$ 3,000 \
\hline \begin{array} { l } 
\text { Percent of total } \
\text { income earned in the } \
\text { top quintile }
\end{array} & 41.4 \% & 49.8 \% & 47.6 \% & 40.6 \% \
\hline \begin{array} { l } 
\text { Percent of total } \
\text { income earned in the } \
\text { bottom quintile }
\end{array} & 8.6 \% & 6.1 \% & 7.0 \% & 8.0 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

Uganda has the lowest average income for those in the bottom quintile at 6.1%, indicating the lowest share of total income among the options provided.

Question 11

Table: Average Income and Distribution of Income Data provides recent data from the World Bank on average income and the distribution of income in four countries.
Based on the data in the table, those in the top quintile have the highest average income in which country?
$$\begin{array}{l}
\text { Table: Average Income and Distribution of Income Data }\
\begin{array} { | l | l | l | l | l | } 
\hline & \text { Bangladesh } & \text { Uganda } & \text { Sri Lanka } & \text { Mongolia } \
\hline \begin{array} { l } 
\text { Average household } \
\text { income in the nation }
\end{array} & \$ 1,000 & \$ 1,000 & \$ 3,000 & \$ 3,000 \
\hline \begin{array} { l } 
\text { Percent of total } \
\text { income earned in the } \
\text { top quintile }
\end{array} & 41.4 \% & 49.8 \% & 47.6 \% & 40.6 \% \
\hline \begin{array} { l } 
\text { Percent of total } \
\text { income earned in the } \
\text { bottom quintile }
\end{array} & 8.6 \% & 6.1 \% & 7.0 \% & 8.0 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

Sri Lanka has the highest average household income in the nation at $3,000, and the income distribution indicates that the top quintile earns 47.6% of the total income. Therefore, those in the top quintile in Sri Lanka have the highest average income compared to the other countries listed.

Question 12

Table: Average Income and Distribution of Income Data provides data on average income and the distribution of income in four countries.
According to the data in the table, which country has the largest dollar gap between the average income of those in the top and bottom quintiles?
$$\begin{array}{l}
\text { Table: Average Income and Distribution of Income Data }\
\begin{array} { | l | l | l | l | l | } 
\hline & \text { Country A } & \text { Country B } & \text { Country C } & \text { Country D } \
\hline \begin{array} { l } 
\text { Average household } \
\text { income in the nation }
\end{array} & \$ 20,000 & \$ 50,000 & \$ 90,000 & \$ 90,000 \
\hline \begin{array} { l } 
\text { Percent of total income } \
\text { earned in the top } \
\text { quintile }
\end{array} & 60 \% & 40 \% & 40 \% & 60 \% \
\hline \begin{array} { l } 
\text { Percent of total income } \
\text { earned in the bottom } \
\text { quintile }
\end{array} & 5 \% & 12 \% & 12 \% & 5 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

Country D has the largest dollar gap because it has the same high average household income as Country C (\$90,000) but a larger disparity in income distribution between the top and bottom quintiles (60% vs. 5%) compared to the other countries.

Question 13

Table: Average Income and Distribution of Income Data provides recent data from the World Bank on average income and the distribution of income in four countries.
According to the data in the table, which statement is correct regarding the situations of Sri Lanka and Mongolia?
$$\begin{array}{l}
\text { Table: Average Income and Distribution of Income Data }\
\begin{array} { | l | l | l | l | l | } 
\hline & \text { Bangladesh } & \text { Uganda } & \text { Sri Lanka } & \text { Mongolia } \
\hline \begin{array} { l } 
\text { Average household } \
\text { income in the nation }
\end{array} & \$ 1,000 & \$ 1,000 & \$ 3,000 & \$ 3,000 \
\hline \begin{array} { l } 
\text { Percent of total } \
\text { income earned in the } \
\text { top quintile }
\end{array} & 41.4 \% & 49.8 \% & 47.6 \% & 40.6 \% \
\hline \begin{array} { l } 
\text { Percent of total } \
\text { income earned in the } \
\text { bottom quintile }
\end{array} & 8.6 \% & 6.1 \% & 7.0 \% & 8.0 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

Both Sri Lanka and Mongolia have the same average household income, but the percentage of total income earned by the bottom quintile is higher in Mongolia (8.0%) than in Sri Lanka (7.0%), indicating that the average income in the bottom quintile is higher in Mongolia.

Question 14

Use the World Bank data in Table: Costa Rica Distribution of Income, 1986 and 2016 to determine what happened to the distribution of income in Costa Rica over the time period 1986 to 2016.

Accepted Answer

The table shows that the Gini coefficient, a measure of income inequality, increased from 0.429 in 1986 to 0.498 in 2016. This indicates that income inequality in Costa Rica became more unequal during this time period.

Question 15

Hedra is a legislator who is concerned about income inequality in her country. She has data on the distribution of income over time that show that the distribution is becoming more unequal. Which important step should she take next in order to make credible arguments in the legislature that income inequality is an issue that needs attention?

Accepted Answer

It is important for Hedra to determine if her conclusions are consistent across alternative ways of conceptualizing and measuring the issue. This will ensure that her arguments are based on sound evidence and not influenced by any biases or limitations in her data. Examining current data and checking data over time may also be important, but it is crucial to ensure that her conclusions are consistent across different measurement approaches. Considering whether the outcome is fair is also important, but first, she needs to establish a clear and consistent understanding of the issue.

Question 16

Jose has spent most of his life in the top two quintiles of income distribution, although he did spend a year without earned income when he lost his job during a recession. Which of the following ways of thinking about inequality explains why someone might make the observation that Jose's living standard did not vary as much as his income varied?

Accepted Answer

Permanent income theory suggests that individuals base their consumption on an average of their expected lifetime income rather than current income, which can explain why Jose's living standard remained stable despite fluctuations in his income.

Question 17

In the field of economics, the observation that the living standard of a household is more stable than its income, because people think in terms of their long-term earnings as they spend, is known as:

Accepted Answer

The observation described in the question is known as the permanent income hypothesis, which states that individuals base their consumption decisions on their expected long-term income rather than their current income. This leads to a more stable living standard than income fluctuations would suggest.

Question 18

Focusing on differences in the amount people actually spend on goods and services as a measure of their material well-being rather than comparing their current incomes leads to a focus on _____ in discussions of the level of economic inequality across households.

Accepted Answer

Focusing on consumption instead of income captures a more accurate measure of one's material well-being since it reflects the actual goods and services that a household is able to purchase and consume. Thus, differences in consumption levels can reveal disparities in household economic well-being and provide a better indication of economic inequality across households.

Question 19

_____ is a stock that is more unequal across households than income, which is a flow.

Accepted Answer

Wealth is a stock variable that represents the accumulated assets and liabilities of households, which can include savings, investments, property, and debts. While income is a flow variable that represents the amount of money earned or received by households within a specific time period, such as a year. Wealth tends to be more unequal across households because it reflects not only current income, but also past income and other factors like inheritance and luck. Age, permanent income, and consumption are also important factors that can contribute to inequality, but they do not represent stock variables like wealth.

Question 20

Economists believe that average lifetime income is a better predictor of a person's current living standard than current income because:

Accepted Answer

People can save and borrow to smooth out their consumption over their lifetime, making average lifetime income a better indicator of living standards than current income. This reflects the economic principle of consumption smoothing, where individuals plan their spending and saving to maintain a stable standard of living throughout their life.

Quiz 13: Inequality, Social Insurance, and Redistribution

In the text, the population is divided into _ groups based on income, and each group is called _ when data on the distribution of income in a country are presented.

Data on the distribution of income for the United States show that from 1970 through 2014, the share of income earned by the top quintile _, and the share earned by the bottom quintile _.

Use the World Bank data in Table: Costa Rica Distribution of Income, 1986 and 2016 to determine what happened to the distribution of income in Costa Rica over the time period 1986 to 2016.

In the field of economics, the observation that the living standard of a household is more stable than its income, because people think in terms of their long-term earnings as they spend, is known as:

Focusing on differences in the amount people actually spend on goods and services as a measure of their material well-being rather than comparing their current incomes leads to a focus on _____ in discussions of the level of economic inequality across households.

_____ is a stock that is more unequal across households than income, which is a flow.

Economists believe that average lifetime income is a better predictor of a person's current living standard than current income because: