Question 1

Measures of poverty (for example, the poverty line) and the distribution of income (for example, the Lorenz curve and the Gini coefficient) are misleading for which of the following two reasons?
A) First, these measures do not take into account income mobility over time. Second, these measures ignore the effects of government programs meant to reduce poverty.
B) First, none of these measures are adjusted for inflation. Second, they do not measure income on a per capita basis.
C) First, these measures fail to include the income U.S. citizens earn working for foreign firms that have operations located in the United States. Second, these measures fail to include income foreign citizens earn working for U.S. firms that have operations in foreign countries.
D) First, these measures fail to include dividend and interest income earned on stocks and bonds. Second, these measures fail to include the value of goods and services citizens make for their own consumption that are not sold in markets.

Accepted Answer

The poverty line and income distribution measures can be misleading because they do not account for income mobility over time (i.e. people moving in and out of poverty) and they do not consider the effect of government programs aimed at reducing poverty.

Question 2

Absolute poverty measures vary from country to country. For example, in 2013, the poverty line in the United States for a family of four with two children was an annual income of $23,550 but economists often use a much lower threshold income of $1 per day when calculating the rate of poverty in poor countries. How is this absolute poverty measured?
A) by comparing the percentage of households living below the poverty line to the total population
B) by comparing a household's income to the income required to maintain the average standard of living in a society at a particular time
C) by comparing the amount of goods and services that a household's income can purchase to an objective measure of the amount of income needed to sustain a certain predetermined standard of living
D) by comparing the amount of goods and services that a household's income can purchase in one country to the amount of goods and services that a household's income can purchase in another country of comparable living standard

Accepted Answer

Absolute poverty is measured by comparing the amount of goods and services that a household's income can buy to an objective measure of the amount of income needed to sustain a certain predetermined standard of living. This measurement is independent of the overall income distribution in a society or country and is based on a fixed standard of living.

Question 3

A Gini coefficient of ________ means that an income distribution is perfectly equal, and a Gini coefficient of ________ means the income distribution is perfectly unequal.
A) 0; 1
B) 1; 0
C) 0, 100
D) 100, 0

Accepted Answer

A Gini coefficient of 0 represents perfect equality, meaning that every person has the same income. A Gini coefficient of 1 represents perfect inequality, meaning that one person has all the income and everyone else has none. Therefore, choice A is the correct answer.

Question 4

Which of the following is a transfer payment?
A) the food stamp program
B) a tax deduction
C) Social Security payments
D) an income tax credit

Accepted Answer

The answer of Which of the following is a transfer...

Question 5

Which of the following statements best represents the opinion of many economists regarding the impact that changes in tax laws have had on recent changes in income inequality in the United States?
A) Reductions in income tax rates have favored high-income individuals more than low-income individuals. As a result, reductions in federal income tax rates have led to more income inequality.
B) Reductions in income tax rates have created greater incentives for low-income individuals to work, save and invest. As a result, reductions in federal income tax rates have led to less income inequality.
C) Reductions in income tax rates probably have had little impact on the distribution of income.
D) Reductions in income tax rates have been offset by increases in corporate income tax rates and payroll taxes. As a result, greater income inequality in the 1990s has been followed by a more equal distribution of income since 2001.

Accepted Answer

The answer of Which of the following statements best represents...

Question 6

Income inequality in the United States has increased somewhat over the past 25 years. Two factors that appear to have contributed to this are
A) tax cuts on high income individuals and large increases in prices of stocks.
B) strong economic growth and low inflation.
C) rapid technological change and expanding international trade.
D) outsourcing of jobs by U.S. firms and cuts in taxes on capital gains.

Accepted Answer

Rapid technological change and expanding international trade have led to a shift in demand towards skilled workers who can work with technology and have global connections, increasing their wages. At the same time, there has been a decline in demand for lower-skilled workers, reducing their wages. This has resulted in income inequality. Tax cuts, stock prices, and outsourcing may have contributed to this trend, but their impact is likely smaller than the effects of technological change and trade. Strong economic growth and low inflation have not necessarily reduced income inequality, as economic gains may not be shared equally among all income groups.

Question 7

Studies by the U.S. Census Bureau have shown that
A) families remain below the poverty line for an average of five years.
B) there is significant income mobility in the U.S. over time.
C) income mobility in the U.S. is minimal.
D) over half the people below the poverty line never move out of poverty.

Accepted Answer

The U.S. Census Bureau's studies have shown that there is significant income mobility in the U.S. over time. This means that individuals and families are able to move up or down the income ladder over the course of their lives. While some people may experience long-term poverty, many are able to improve their economic situation.

Question 8

Which of the following groups had the highest poverty rate in 2011 in the United States?
A) Asians
B) blacks
C) Hispanics
D) female heads of families

Accepted Answer

According to the U.S. Census Bureau, in 2011, the poverty rate for families with female householders (no husband present) was 31%. This was the highest poverty rate among all household types.

Question 9

Sheldon Cleaver commented on the difficulty people have in overcoming poverty in the United States: "Most people whose incomes fall below the poverty line have difficulty pulling themselves above the line in future years. In this sense, poverty becomes a vicious cycle. I believe the psychological damage households face when they are branded with the 'poverty' label in our society is a major factor in their remaining in poverty. Despair is a major reason why the percentage of people with incomes that lie below the poverty line never falls below 10 percent." Which of the following correctly evaluates Cleaver's statement?
A) Cleaver is correct. Economists often fail to take into account psychological factors when they analyze poverty and the distribution of income in the United States. Policies must take such factors into account if we are to make progress in eliminating poverty.
B) Cleaver is correct when he notes that poverty is a chronic problem. The best way to reduce poverty is to force the poor to become better educated so that they can work their way out of poverty.
C) Cleaver is correct, but he is looking at the wrong statistic. The official poverty line understates the true degree of poverty in the United States.
D) Cleaver assumes that all those with incomes below the poverty line in one year remain in poverty in subsequent years. In fact, research has shown that the number of people who remain in poverty for many years is much smaller than the number who are in poverty during any one year.

Accepted Answer

The answer of Sheldon Cleaver commented on the difficulty people...

Question 10

The Gini coefficient for the United States in 1980 was 0.403. In 2011, the coefficient was equal to 0.477. This means that
A) per capita income in the United States rose from 1980 to 2011.
B) there was a decrease in the amount of government transfer payments from 1980 to 2011.
C) cuts in federal income tax rates in the early 1980s and 2001 helped to reduce income inequality.
D) income inequality increased from 1980 to 2011.

Accepted Answer

The increase in the Gini coefficient from 1980 to 2011 indicates a rise in income inequality.

Question 11

Which of the following statements about the distribution of income in the United States is true?
A) The United States has the most unequal distribution of income of any high-income country in the world.
B) The United States has a more unequal distribution of income than Bolivia and Botswana.
C) The distribution of income in the United States is fairly equal and there have been no dramatic changes over time.
D) The distribution of income in the United States is unequal and has become significantly more unequal over time.

Accepted Answer

The answer of Which of the following statements about the...

Question 12

All Gini coefficients must lie between 0 and 1. The lower the value,
A) the more unequal the income distribution.
B) the closer the income distribution is to being equal.
C) the greater the degree of poverty.
D) the lower the degree of poverty according to the federal government's definition of poverty.

Accepted Answer

The Gini coefficient measures income inequality and ranges from 0 (perfect equality) to 1 (perfect inequality). As the value of the Gini coefficient decreases, it means that the income distribution is closer to being equal, indicating less income inequality. Therefore, choice B is the correct answer.

Question 13

If official poverty statistics for the United States included transfer payments individuals receive from the government, such as Social Security payments and other non-cash benefits such as food stamps,
A) the poverty rate would be lower.
B) poverty would be eliminated.
C) income inequality would be greater.
D) the poverty rate would be overstated.

Accepted Answer

Including transfer payments and non-cash benefits in poverty statistics would increase the income of those below the poverty line, thus lowering the poverty rate. However, it would not eliminate poverty entirely.

Question 14

Figure 18-7  Figure 18-7 shows the Lorenz curve for a hypothetical country.
-Refer to Figure 18-7. The second lowest 20 percent of households
A) earn 12 percent of the society's total income.
B) earn 16 percent of the society's total income.
C) earn 28 percent of the society's total income.
D) earn 40 percent of the society's total income.

Accepted Answer

The Lorenz curve shows the cumulative percentage of income earned by each percentile. The second lowest 20 percent of households would represent the 20th to 40th percentile. From the curve, we can see that this group earns approximately 16 percent of the society's total income.

Question 15

Figure 18-7  Figure 18-7 shows the Lorenz curve for a hypothetical country.
-Refer to Figure 18-7. The second highest 20 percent of households
A) earn 24 percent of the society's total income.
B) earn 28 percent of the society's total income.
C) earn 42 percent of the society's total income.
D) earn 72 percent of the society's total income.

Accepted Answer

The answer of Figure 18-7  Figure 18-7 shows the...

Question 16

Which of the following summarizes the information provided by a Lorenz curve?
A) the Lorenz coefficient
B) the income distribution ratio
C) the Gini coefficient
D) the slope (the rise divided by the run) of the Lorenz curve at a particular point on the curve

Accepted Answer

The Lorenz curve summarizes the distribution of income or wealth in a population by plotting the cumulative share of income or wealth held by each percentile of the population. The Gini coefficient is a summary statistic that measures the extent to which the Lorenz curve deviates from perfect equality, with a value of 0 indicating perfect equality (each percentile holds the same share of income or wealth) and a value of 1 indicating perfect inequality (one percentile holds all the income or wealth). Therefore, choice C summarizes the information provided by a Lorenz curve.

Question 17

What does a Lorenz curve illustrate?
A) a comparison of the distribution of income in two different countries
B) the distribution of income within a country in a given time period
C) the share of taxes paid by different groups of households
D) the change over time in the percentage of households with incomes that place them below the poverty line

Accepted Answer

A Lorenz curve is a graph that measures income inequality within a country by plotting the cumulative share of national income held by a given percentage of the population. The closer the Lorenz curve is to the diagonal line, the more equal the distribution of income is. Therefore, option B is the correct answer. Option A compares the distribution of income in two different countries, but a Lorenz curve only shows income distribution within a single country. Option C refers to tax distribution, while option D refers to a change over time in poverty levels, neither of which are directly related to a Lorenz curve.

Question 18

The poverty rate is defined as the percentage of the
A) labor force that is poor according to the federal government's definition of poverty.
B) population that is exempt from paying federal income taxes.
C) population who qualify to receive welfare payments and food stamps.
D) population that is poor according to the federal government's definition of poverty.

Accepted Answer

The poverty rate is defined as the percentage of the population that is poor according to the federal government's definition of poverty. It is not limited to the labor force or those who qualify for government assistance programs.

Question 19

As a group, people with high incomes are likely to have
A) greater-than-average family inheritances and greater-than-average SAT scores.
B) greater-than-average holdings of stocks and bonds and lower-than-average productivity.
C) greater-than-average productivity and greater-than-average amounts of capital.
D) a stable marriage and no children.

Accepted Answer

People with high incomes are likely to have greater-than-average productivity, as they are able to earn more due to their skills and abilities. They are also likely to have greater-than-average amounts of capital, as they may have invested in assets such as property or stocks and bonds. Family inheritances and SAT scores are not necessarily related to income levels, and it is not necessarily true that high-income individuals have lower productivity or no children.

Question 20

Which of the following tax systems would help reduce income inequality the most?
A) a regressive tax system
B) a proportional tax system
C) a progressive tax system
D) a consumption tax system

Accepted Answer

A progressive tax system is designed in a way that imposes a higher tax rate on individuals with higher income and lower tax rates on individuals with lower income. Therefore, it helps to redistribute income from the rich to the poor, and as a result, it reduces income inequality to a significant degree.

Quiz 18: Public Choice, Taxes, and the Distribution of Income

Measures of poverty (for example, the poverty line) and the distribution of income (for example, the Lorenz curve and the Gini coefficient) are misleading for which of the following two reasons?

A Gini coefficient of means that an income distribution is perfectly equal, and a Gini coefficient of means the income distribution is perfectly unequal.

Which of the following is a transfer payment?

Which of the following statements best represents the opinion of many economists regarding the impact that changes in tax laws have had on recent changes in income inequality in the United States?

Income inequality in the United States has increased somewhat over the past 25 years. Two factors that appear to have contributed to this are

Studies by the U.S. Census Bureau have shown that

Which of the following groups had the highest poverty rate in 2011 in the United States?

The Gini coefficient for the United States in 1980 was 0.403. In 2011, the coefficient was equal to 0.477. This means that

Which of the following statements about the distribution of income in the United States is true?

All Gini coefficients must lie between 0 and 1. The lower the value,

If official poverty statistics for the United States included transfer payments individuals receive from the government, such as Social Security payments and other non-cash benefits such as food stamps,

Figure 18-7 Figure 18-7 shows the Lorenz curve for a hypothetical country. -Refer to Figure 18-7. The second lowest 20 percent of households

Figure 18-7 Figure 18-7 shows the Lorenz curve for a hypothetical country. -Refer to Figure 18-7. The second highest 20 percent of households

Which of the following summarizes the information provided by a Lorenz curve?

What does a Lorenz curve illustrate?

The poverty rate is defined as the percentage of the

As a group, people with high incomes are likely to have

Which of the following tax systems would help reduce income inequality the most?