Deck 21: Income Inequity and Poverty

Question 1

Because people can borrow and save to smooth out life-cycle changes in income, their standard of living in any year depends more on lifetime income than on that year's income.

Answer 1

True

Question 2

According to utilitarians, the government should continue to redistribute income until everyone in society has exactly the same income.

Answer 2

False

Question 3

Poverty is correlated with race, age and family composition.

Answer 3

True

Question 4

Trends over time support the view that the decline of the two-parent family is largely the effect of the welfare system.

Question 5

In Australia, the share of pre-tax income going to the bottom fifth of families in the income distribution has been:

A) rising
B) falling
C) roughly steady
D) no data is available

Question 6

Advocates of direct cash payment assistance to the poor argue that although in-kind transfers are generally respectful of individual preferences, such transfers are inefficient.

Question 7

A person's earnings depend on:

A) how well the economy is doing
B) whether or not the economy is experiencing inflation
C) the supply and demand for that person's labour
D) how much profit that person's employer is able to make

Question 8

Political philosophers agree in their views about the role of government in altering the distribution of income.

Question 9

The invisible hand of the marketplace acts to allocate resources efficiently as well as equitably.

Question 10

The income distribution in a society is:

A) mostly determined by government taxation policies
B) mostly determined by rental income
C) mostly determined by the geographical location of taxpayers
D) mostly determined by factors that determine wages

Question 11

Rawls would determine the distribution of income as if we were behind a veil of ignorance that prevented us from knowing our own stations in life.

Question 12

One way to measure the poverty rate is by calculating the percentage of the population whose family income is below the poverty line.

Question 13

Libertarians conclude that equality of incomes is more important than equality of opportunity.

Question 14

Minimum-wage legislation is likely to be least effective in reducing poverty when the demand for labour is inelastic.

Question 15

Many policies to help the poor are effective at encouraging the poor to escape from poverty.

Question 16

Under a negative income tax, it is likely for a person who does not earn income to receive assistance from the government.

Question 17

A measure of permanent income would be similar to a person's average or 'normal' income.

Question 18

If cash is transferred to the poor, this is known as an in-kind transfer.

Question 19

The distortionary effect of government redistribution programs means that perfect utility maximising outcomes are unattainable.

Question 20

The increase in women's workforce participation rate over the last 50 years has been more pronounced for higher income groups. This trend has tended to increase inequality.

Question 21

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

A) permanent income
B) transitory income
C) lifetime income
D) in-kind transfers

Question 22

Suppose income was equally distributed across all families, then:

A) 60 per cent of the families would receive exactly 60 per cent of the income
B) the relative share of income would decline as the number of families are increased
C) the relative share of income would increase as the number of families are increased
D) all families would more likely be rich than poor

Question 23

Out of the following countries, the share of total income going to the poorest fifth of the population is highest in:

A) Australia
B) Japan
C) USA
D) Brazil

Question 24

Measures of poverty that fail to account for the value of in-kind transfers:

A) understate the actual poverty rate
B) have little effect on the validity of reported poverty rates
C) are generally more reliable in accounting for annual variation in actual poverty rates
D) overstate the actual poverty rate

Question 25

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

A) aggregate income rather than annual personal income
B) income averaged across seasons rather than across years
C) annual extended family income rather than annual personal income
D) lifetime income rather than annual income

Question 26

In Australia, the share of pre-tax income going to the top fifth of families is roughly ______ times the share of income going to the bottom fifth of families in the income distribution:

A) five
B) ten
C) twenty
D) one-hundred

Question 27

Out of the following countries, the share of total income going to the richest fifth of the population is highest in:

A) Australia
B) Japan
C) USA
D) Brazil

Question 28

People have their highest saving rates when they are:

A) young and single
B) married with young children
C) middle-aged
D) retired

Question 29

Economic mobility refers to the:

A) ability of families to freely relocate to find good jobs
B) movement of resources from one industry to another
C) government's attempt to distribute monetary assistance to areas most in need
D) movement of people among income classes

Question 30

The most commonly used approach to define the poverty line in Australia is to follow the definition of the Henderson Commission, conducted in 1975. This sets the poverty line at:

A) 75.5 per cent of average weekly earnings
B) 56.5 per cent of average weekly earnings
C) 50 per cent of average weekly earnings
D) 25 per cent of average weekly earnings

Question 31

The life cycle effect characterises a lifetime income profile in which income:

A) falls during the early years of market activity and peaks at retirement
B) rises and falls in conjunction with the business cycle
C) rises as a worker gains maturity and experience
D) tends to follow a seasonal pattern

Question 32

A person's permanent income is:

A) the base level of income which they need to support their standard of living
B) the base level of income which their employer pays
C) the guaranteed income provided by the welfare system
D) a person's average income over time

Question 33

In Australia, the share of pre-tax income going to the top fifth of families in the income distribution has been:

A) rising
B) falling
C) roughly steady
D) no data is available

Question 34

Economists refer to the regular pattern of income variation over a person's lifetime as the:

A) life pattern effect
B) cyclical redundancy effect
C) periodic cycle effect
D) life cycle effect

Question 35

Over the past few years, growth in average income has:

A) failed to decrease the poverty rate
B) decreased the poverty rate
C) eliminated poverty
D) increased the poverty rate in some years and decreased it in other years

Question 36

Income inequality in an economy is traditionally measured by:

A) calculating the bell curve of ability, effort and chance that exists in an economy
B) calculating the percentage of families that fall into broad income classifications
C) referring to standard international distribution tables
D) using something like the normal distribution

Question 37

A permanent income theory suggests that a person's income is composed of predictable life cycle variation and:

A) permanent changes that reflect the seasonal capacity of the economy
B) structural change in the economy
C) aggregate variation resulting from predictable business cycles
D) random and transitory forces in the economy

Question 38

According to the Henderson Commission, the poverty line in Australia was set at:

A) 25 per cent of average weekly earnings
B) 56.5 per cent of average weekly earnings
C) 65.5 per cent of average weekly earnings
D) 75 per cent of average weekly earnings

Question 39

Evidence suggests that the women's movement has:

A) decreased income inequality across households
B) increased income inequality across households
C) had no effect on the distribution of income across households
D) decreased the importance of traditional measures of income inequality

Question 40

Income mobility studies suggest that poverty:

A) is not a long-term problem for most families
B) is a long-term problem for a relatively large number of families
C) cannot be alleviated by government sponsored anti-poverty programs
D) cannot be alleviated by privately sponsored anti-poverty programs

Question 41

The political philosophy according to which the government should choose policies that maximise the total utility of everyone in society is called:

A) utilitarianism
B) utility maximisation
C) libertarianism
D) rawlsianism

Question 42

The utilitarian case for redistributing income is based on the assumption of:

A) a notion of fairness engendered by equality
B) diminishing marginal utility
C) rising marginal utility
D) collective consensus

Question 43

Brian earns more than Lynne. A benevolent legislator has proposed taxing Bill in order to supplement Lynne's income. A libertarian would view this proposal as:

A) an inappropriate role for government, since government cannot morally redistribute income that is not its own
B) a way to enhance Lynne's income in a socially responsible way
C) a way to increase social justice
D) validation of the superiority of a libertarian maximin criterion over Rawlsian social justice

Question 44

Libertarianism identifies a role for government when:

A) an egalitarian distribution of income is inconsistent with market outcomes
B) attorneys are required to facilitate a free market exchange
C) the income distribution is altered by illegal means (e.g. theft)
D) workers lose their jobs as a result of structural changes in the economy

Question 45

Amy currently earns $80 000 a year, while John earns $30 000 a year. Suppose that both of their incomes are subject to diminishing marginal utility. From a utilitarian perspective taking a dollar from Amy and giving it to John will:

A) lower Amy's marginal utility of income
B) increase John's marginal utility of income
C) increase society's total utility
D) do none of the above

Question 46

The concept of utility is fundamental to utilitarianism and describes the:

A) method whereby wealth is stored
B) method by which society chooses to allocate resources
C) optimal distribution of wealth in society
D) level of satisfaction derived from a person's circumstances

Question 47

According to utilitarians, the ultimate objective of private and public actions is to:

A) ensure an egalitarian distribution of income
B) provide for the betterment of the poor
C) maximise the sum of individual utility
D) enhance the income of the rich

Question 48

According to Rawls, principles of justice are the result of:

A) command-and-control policies
B) domination of the powerful by the weak
C) workers owning the factors of production
D) fair agreement and bargain

Question 49

In general, which of the following would libertarians conclude is more important than equality?

A) income
B) entrepreneurial compensation
C) capital compensation
D) opportunity

Question 50

The maximin criterion suggests that the focus of social policy would be to:

A) elevate the wellbeing of all workers
B) elevate the wellbeing of those at the bottom of the income distribution
C) ensure an egalitarian distribution of income
D) expropriate the factors of production from the capitalist class

Question 51

Diminishing marginal utility suggests that:

A) the poor receive more satisfaction than the rich from the last dollar they respectively spend
B) more is always preferred to less
C) the poor are less efficient at spending money than the rich
D) the wellbeing of society is maximised when the distribution of income is equal

Question 52

When incentives to earn income are distorted by income redistribution programs:

A) total income in an economy can fall
B) total aggregate utility in society can fall
C) losses can exceed potential gains from greater equality of income
D) all of the above can occur

Question 53

What is the political philosophy called in which government should choose policies deemed to be just, as evaluate by an impartial observer behind a 'veil of ignorance':

A) utilitarianism
B) Rawlsianism
C) libertarianism
D) 'veil of ignorance' criterion

Question 54

Permanent income is distributed between income groups ________:

A) more evenly than current income
B) less evenly than current income
C) about the same as current income
D) higher than current income

Question 55

Whether or not policymakers should try to make our society more egalitarian is largely a matter of:

A) political philosophy
B) economic efficiency
C) altruistic concern for others
D) common sense

Question 56

A libertarian is likely to argue that:

A) only individual members of society can earn income
B) outcomes always dominate processes
C) society is responsible for ensuring an equal distribution of income
D) government has no role in the economy

Question 57

The veil of ignorance refers to:

A) the fact that most people are unaware of their place in society
B) the Rawlsianism argument that justice can never be agreed upon
C) a thought experiment when designing policy where one does not know where he/she will end up in society
D) the claim that government should maximise the wellbeing of the least well off in society

Question 58

As a result of the trade-off between income equality and incentives to work, an optimal redistribution policy:

A) must always achieve a full egalitarian society
B) is only consistent with transfers to the middle class
C) always falls short of a full egalitarian society
D) can never be funded through taxes on wage income

Question 59

Which of the following reasons suggests that income-based measures of poverty are not ideal when considering the poverty rates of young people:

A) the economic life cycle of an adult suggests that you will supplement your income when young with borrowing
B) young people tend to have lower standards and expectations than older people and retirees
C) young people are not as geographically mobile as older people and therefore then to be stuck in low paying jobs
D) the incomes of young people is more volatile than average and therefore any one year is not a good measure of income

Question 60

In the parable of the leaky bucket, a fundamental problem with government redistribution programs is identified. As long as the government only has 'leaky buckets' at its disposal:

A) full egalitarian policies will always dominate competing policy options
B) affirmative action programs are doomed to failure
C) equality of economic opportunity is an unattainable goal
D) it should not try to reach complete equality in income

Question 61

There are 100 people in society and they have to decide on an income distribution from behind the veil of ignorance. Use the maximin principle to decide which of the following income distributions would be selected by a Rawlsian liberal. Explain your answer.
In state A, eight people earn $10m, 92 people earn $5m
In state B, 40 people earn $10m and 59 people earn $7m and 1 person earns $1m.

Question 62

Graph 21-1

Refer to Graph 21-1. According to the graph, if the government imposes a minimum wage below W_o, it is likely to:

A) have no effect on employment
B) provide more income to the working poor than they collectively received before the minimum wage was set
C) reduce employment to a level below Q_o
D) increase employment to a level above Q_o

Question 63

For most government programs that are designed to help the poor:

A) being poor is typically sufficient to qualify for assistance
B) being poor, by itself, is typically not sufficient to qualify for assistance
C) the poor may not receive assistance because the poverty line varies so much that it makes them difficult to identify
D) recipients of government assistance are often declared ineligible to receive assistance from private sources

Question 64

Explain what is meant by 'in-kind transfer' programs. Briefly outline the pros and cons associated with an in-kind transfer program.

Question 65

What is meant by a perfectly equal distribution of income? Use a graph to depict such a situation.

Question 66

What effect has increased workforce participation by women since the 1950s had on income inequality in Australia? Why is this the case?

Question 67

What are some of the problems associated with measuring inequality?

Question 68

Opponents of legislation that proposes to limit the time a family can receive welfare benefits are most likely to argue that time limits are undesirable because:

A) children will become innocent victims if parents are forced off welfare
B) the money saved will be diverted to defence spending
C) long periods on welfare erode work skills
D) there is no evidence to suggest a pattern of welfare dependency

Question 69

Evidence suggests that:

A) the best way to deter immigrants is to make legal aliens ineligible for many welfare benefits
B) legislation designed to limit the time a family can be on welfare will never be passed
C) welfare dependency is embraced by over 80 per cent of new welfare recipients
D) the longer a family is on welfare, the harder it is to get off welfare

Question 70

Many people have been critical of statistics that are used to characterise income inequality on the grounds that as long as the average income of the poor is increasing, their position relative to the rich should not matter. Evaluate this critique.

Question 71

A tax system that collects revenue from high-income households and gives transfers and tax concessions to low-income households is known as:

A) social security
B) negative income tax
C) minimum wage laws
D) in-kind transfers

Question 72

Do Libertarians and Rawlsian liberals agree that governments should redistribute income? Briefly explain your answer.

Question 73

Discuss the life cycle hypothesis of income distribution.

Question 74

Discuss the permanent income hypothesis of income distribution.

Question 75

Explain the concept of diminishing marginal utility and describe the role that it plays in the utilitarian argument for redistribution of income.

Question 76

Table 21-1

Given Table 21-1, which country has a more equally distributed income? Explain your answer.

Question 77

A school voucher system introduced in the United States has lead to:

A) less low income households sending their children to private schools
B) more low income households sending their children to private schools
C) no change in the number of low income households sending their children to private schools
D) decrease in the number of private school schools

Question 78

Suppose the government proposes a negative income tax that calculates taxes owed according to the formula TAXES OWED = (1/4 * INCOME) - $15 000. Suppose a family only earns $20 000. How much tax would they pay?

A) they will pay a tax of $5000
B) they will pay a tax of $1250
C) they will receive a net income subsidy of $5000
D) they will receive a net income subsidy of $10 000

Question 79

Suppose the government proposes a negative income tax that calculates taxes owed according to the formula TAXES OWED = (1/2 * INCOME) - $5000. A family that earns an income of $30 000 will:

A) pay a tax of $10 000
B) receive an income subsidy of $10 000
C) neither pay taxes nor receive an income subsidy
D) pay $15 000 in taxes

Question 80

Graph 21-1

Refer to Graph 21-1. Advocates of minimum wage legislation would suggest that an effective minimum wage would be set at a level:

A) below W_o, and employment would rise above Q_o
B) above W_o, and employment would fall below Q_o
C) above W_o, and employment would rise above Q_o
D) below W_o, and employment would fall below Q_o