Chapter 20 Income Inequality and Poverty

TRUE/FAL E 1. The poverty line is set by the government so that 10 percent of all families fall below that line and are thereby classified as poor. ANS: !" : 1 #$ : %0&1 NAT: Analytic '(): The st*dy of economics+ and definitions of economics T(,: ,overty line -S): !efinitional %. The .nited States has more income ine/*ality than 0apan+ 1ermany+ and )anada. ANS: T !" : 1 #$ : %0&1 NAT: Analytic '(): The st*dy of economics+ and definitions of economics T(,: "ncome ine/*ality -S): !efinitional 2. The .nited States has more income ine/*ality than 3ra4il and So*th Africa. ANS: !" : 1 #$ : %0&1 NAT: Analytic '(): The st*dy of economics+ and definitions of economics T(,: "ncome ine/*ality -S): !efinitional 5. Standard meas*rements of the degree of income ine/*ality ta6e both money income and in&6ind transfers into acco*nt. ANS: !" : % #$ : %0&1 NAT: Analytic '(): The st*dy of economics+ and definitions of economics T(,: "n&6ind transfers 7 "ncome ine/*ality -S): !efinitional 8. 0ohn #awls+ who developed the way of thin6ing called liberalism+ arg*ed that government policies sho*ld be aimed at ma9imi4ing the s*m of *tility of everyone in society. ANS: !" : % #$ : %0&% NAT: Analytic '(): The role of government T(,: .tility -S): "nterpretive :. (ne e9isting government program that wor6s m*ch li6e a negative income ta9 is the $arned "ncome Ta9 )redit. ANS: T !" : % #$ : %0&2 NAT: Analytic '(): The role of government T(,: Negative income ta9 -S): "nterpretive ;. (ne e9isting government program that wor6s m*ch li6e a negative income ta9 is -edicaid. ANS: !" : % #$ : %0&2 NAT: Analytic '(): The role of government T(,: Negative income ta9 -S): "nterpretive <. The invisible hand of the mar6etplace acts to allocate reso*rces efficiently+ b*t it does not necessarily ens*re that reso*rces are allocated fairly. ANS: T !" : 1 #$ : %0&0 NAT: Analytic '(): $fficiency and e/*ity T(,: "ncome ine/*ality -S): Applicative =. >hen the government enacts policies to ma6e the distrib*tion of income more e/*itable+ it distorts incentives+ alters behavior+ and ma6es the allocation of reso*rces less efficient. ANS: T !" : 1 #$ : %0&0 NAT: Analytic '(): The role of government T(,: "ncome ine/*ality -S): Applicative

:;

:<

)hapter %0?"ncome "ne/*ality and ,overty

10. "n the .nited States in %008+ the bottom fifth of the income distrib*tion had incomes below @1=+%80. ANS: !" : 1 #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: "ncome ine/*ality -S): Applicative 11. The top 8 percent of ..S. ann*al family income in %008 was @1<5+800 or more. ANS: T !" : 1 #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: "ncome ine/*ality -S): Applicative 1%. A ..S. family earning @<0+000 wo*ld be in the top %0 percent of income distrib*tion in %008. ANS: !" : 1 #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: "ncome ine/*ality -S): Applicative 12. ANS: NAT: -S): 15. ree trade and economic growth have red*ced poverty worldwide. T !" : 1 #$ : %0&1 Analytic '(): $fficiency and e/*ity T(,: Applicative

,overty

Altho*gh globali4ation has red*ced income ine/*ality+ the n*mber of people living in e9treme poverty has remained *nchanged. ANS: !" : % #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: ,overty -S): "nterpretive 18. The meas*red poverty rate may not reflect the tr*e e9tent of economic deprivation beca*se it does not incl*de some forms of government assistance. ANS: T !" : 1 #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: ,overty rate -S): Applicative 1:. The poverty line is an absol*te standard and is based on the cost of providing an ade/*ate diet. ANS: T !" : 1 #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: ,overty line -S): !efinitional 1;. The poverty line is based on the percentage of people who cannot afford an ade/*ate diet. ANS: !" : % #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: ,overty line -S): "nterpretive 1<. The poverty rate is a meas*re of people *nable to meet the governmentAs poverty line. ANS: T !" : % #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: ,overty line -S): "nterpretive 1=. The elderly represent the largest demographic gro*p in poverty. ANS: !" : 1 #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity -S): Applicative

T(,:

,overty

%0. Abo*t half of blac6 and Bispanic children in female&headed ho*seholds live in poverty. ANS: T !" : 1 #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: ,overty -S): Applicative

)hapter %0?"ncome "ne/*ality and ,overty

%1. The economic life cycle describes how yo*ng people *s*ally have higher savings rates than middle&aged people. ANS: !" : 1 #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: $conomic life cycle -S): Applicative %%. -any economists believe that a family bases its spending decisions on its permanent+ or average+ income rather than on transitory income. ANS: T !" : 1 #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: $conomic life cycle -S): Applicative %2. Abo*t fo*r o*t of five millionaires in the .nited States earned their money rather than inherited it. ANS: T !" : % #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: $conomic mobility -S): Applicative %5. ANS: NAT: -S): %8. ewer than three percent of families are poor for eight or more years. T !" : 1 #$ : %0&1 Analytic '(): $fficiency and e/*ity T(,: Applicative

:=

$conomic mobility

.tilitarians believe that the proper goal of the government is to ma9imi4e the s*m of the *tilities of everyone in society. ANS: T !" : 1 #$ : %0&% NAT: Analytic '(): The role of government T(,: .tilitarianism -S): "nterpretive %:. The *tilitarian C*stification for redistrib*ting income is based on the ass*mption of diminishing marginal utility. ANS: T !" : 1 #$ : %0&% NAT: Analytic '(): The role of government T(,: .tilitarianism -S): "nterpretive %;. "f a government co*ld s*ccessf*lly achieve the ma9imin criterion+ each member of society wo*ld have an e/*al income. ANS: !" : % #$ : %0&% NAT: Analytic '(): The role of government T(,: 'iberalism -S): "nterpretive %<. According to libertarians+ the government sho*ld redistrib*te income from rich individ*als to poor individ*als to achieve a more e/*al distrib*tion of income. ANS: !" : % #$ : %0&% NAT: Analytic '(): The role of government T(,: 'ibertarianism -S): "nterpretive %=. 'ibertarians believe that the government sho*ld enforce individ*al rights to ens*re that all people have the same opport*nities to *se their talents to achieve s*ccess. ANS: T !" : 1 #$ : %0&% NAT: Analytic '(): The role of government T(,: 'ibertarianism -S): "nterpretive 20. The poverty rate is an absol*te level of income set by the federal government for each family si4e below which a family is deemed to be in poverty. ANS: !" : 1 #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: ,overty rate+ ,overty line -S): !efinitional

;0
21.

)hapter %0?"ncome "ne/*ality and ,overty

An income distrib*tion may not give an acc*rate pict*re of familiesA standards of living beca*se it does not incl*de in&6ind transfers. ANS: T !" : % #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: "ncome ine/*ality -S): "nterpretive 2%. A goal of libertarians is to provide citi4ens with e/*al opport*nities rather than to ens*re e/*al o*tcomes. ANS: T !" : % #$ : %0&% NAT: Analytic '(): $fficiency and e/*ity T(,: 'ibertarianism -S): "nterpretive 22. Temporary Assistance for Needy amilies DTAN E is an e9ample of a negative income ta9 program. ANS: !" : % #$ : %0&2 NAT: Analytic '(): $fficiency and e/*ity T(,: >elfare -S): Applicative 25. >hen poor families in developing co*ntries e9perience an increase in family income+ their children s*pply fewer ho*rs of labor. ANS: T !" : % #$ : %0&2 NAT: Analytic '(): $fficiency and e/*ity T(,: )hild labor -S): Applicative 28. $d*cation is the most important factor e9plaining red*ctions in child labor in Fietnam. ANS: !" : % #$ : %0&2 NAT: Analytic '(): 'abor mar6ets T(,: )hild labor -S): Applicative 2:. "nternet access is the most important factor e9plaining red*ctions in child labor in Fietnam. ANS: !" : % #$ : %0&2 NAT: Analytic '(): 'abor mar6ets T(,: )hild labor -S): Applicative 2;. Since 1=8= the .nited StatesA income distrib*tion has become more e/*al. ANS: !" : % #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: "ncome ine/*ality -S): Applicative 2<. "n %008 the top fifth of income earners acco*nted for over 80G of all income received by .nited StatesA families. ANS: !" : % #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: "ncome ine/*ality -S): Applicative 2=. "n %008 the top 8 percent of income earners acco*nted for over 80G of all income received by .nited StatesA families. ANS: !" : % #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: "ncome ine/*ality -S): Applicative 50. ANS: NAT: -S): rom 1=28 to %008 the share of total income earned by the bottom fifth of income earners rose and then fell. T !" : % #$ : %0&1 Analytic '(): $fficiency and e/*ity T(,: "ncome ine/*ality Applicative

)hapter %0?"ncome "ne/*ality and ,overty

!"RT A# $ER

;1

1. $9plain the relationship between labor earnings and the distrib*tion of income. ANS: A personHs earnings depend on the s*pply and demand for that personHs labor+ which in t*rn depends on nat*ral ability+ h*man capital+ compensating differentials+ discrimination+ and so on. 3eca*se labor earnings ma6e *p abo*t three&fo*rths of the total income in the ..S. economy+ the factors that determine wages are also largely responsible for determining how the economyHs total income is distrib*ted among the vario*s members of society. !" : 1 -S): "nterpretive #$ : %0&0 T(,: "ncome ine/*ality

%. >hat is meant by a perfectly e/*al distrib*tion of incomeI .se a graph to depict s*ch a sit*ation. ANS:

"f income were e/*ally distrib*ted across all families+ each one&fifth of families wo*ld receive one&fifth of income. That is+ %0 percent of all families wo*ld receive %0 percent of all income+ :0 percent of all families wo*ld receive :0 percent of all income+ etc. !" : % -S): Analytical 2. #$ : %0&1 T(,: "ncome ine/*ality

1iven the table shown+ which co*ntry has a more e/*al income distrib*tionI $9plain yo*r answer. 3ottom ifth =.0G 5.<G Second ifth 12.8G 10.8G -iddle ifth 1;.8G 1:.0G o*rth ifth %%.=G %2.8G Top ifth 2;.1G 58.%G

)o*ntry )o*ntry A )o*ntry 3

ANS: )o*ntry A has a more e/*al income distrib*tion. "f income were e/*ally distrib*ted across all families+ each one& fifth of families wo*ld receive one&fifth of income. )o*ntry A is closer to that sit*ation than )o*ntry 3. !" : % -S): "nterpretive 5. #$ : %0&1 T(,: "ncome ine/*ality

$9plain what information is contained in the poverty rate statistic. Are there problems in *sing an absol*te scale to meas*re povertyI "f so+ e9plain them.

ANS: The poverty rate is the percentage of the pop*lation whose family income falls below an absol*te level called the poverty line. The poverty line is set by the federal government at ro*ghly three times the cost of providing an ade/*ate diet. There are several problems associated with meas*ring poverty *sing an absol*te scale. or e9ample+ the cost of living may differ across broad geographic regions. amilies may be better off than their income level indicates if they receive in&6ind transfers. inally+ it is very diffic*lt to meas*re a tr*e Jstandard of living.J !" : % -S): Analytical #$ : %0&1 T(,: ,overty rate 7 ,overty line

;%
8.

)hapter %0?"ncome "ne/*ality and ,overty

)ompare and contrast the Jlife cycleJ hypothesis and the Jpermanent incomeJ hypothesis. >hat are their respective implications for ine/*ality in the income distrib*tionI

ANS: 'ife&cycle variation in income s*ggests that peopleAs spending patterns vary less over their lifetimes than their income patterns. Ko*ng people may borrow so that they can spend more than they earn. An e9ample of this wo*ld be a yo*ng person borrowing to go to college+ b*y a car+ or b*y a ho*se. Ann*al earnings pea6 aro*nd age 80. Not s*rprisingly+ many people save more in middle&age than at other times in their life. Their savings allow them to pay off the debts inc*rred when they were yo*nger and to p*t away money that they will *se to s*pplement their incomes once they retire. The permanent income hypothesis tries to acco*nt for random and transitory forces that affect income. ,eople may borrow when they e9perience a temporary red*ction in income and may save *ne9pected increases in income De.g. a holiday bon*s from an employerE. The two theories are not m*t*ally e9cl*sive. 3oth theories wo*ld indicate that standard meas*res of income distrib*tion overstate ine/*ality in the distrib*tion of well&being. !" : % -S): "nterpretive :. #$ : %0&1 T(,: $conomic life cycle

$9plain the concept of diminishing marginal *tility+ and describe the role that it plays in the *tilitarian arg*ment for the redistrib*tion of income.

ANS: !iminishing marginal *tility refers to the principle that as a personHs income rises+ the e9tra well&being derived from an additional dollar of income falls. The *tilitarian arg*ment of redistrib*tion from rich to poor hinges on the fact that a dollar of additional income to the poor is val*ed more than a dollar of additional income to the rich. "f this is not tr*e+ then the transfer from rich to poor wo*ld act*ally red*ce the well&being of society. !" : T(,: ;. % #$ : %0&% !iminishing marginal *tility 7 .tilitarianism -S): "nterpretive

$9plain how a Jlea6y b*c6etJ can be *sed to ill*strate the *tilitarian arg*ment that governments sho*ld not attempt to completely e/*ali4e individ*al incomes.

ANS: .tilitarians reCect complete e/*ali4ation of income beca*se they believe that people respond to incentives. As s*ch+ redistrib*tion will red*ce some peopleAs wor6 efforts+ which can act*ally lead to less total income generated in the economy. "f the government attempts to redistrib*te income from the rich to the poor thro*gh ta9es+ some of the money will be lost d*e to the distorted incentives and deadweight losses associated with the ta9es. >e can thin6 of the government as transporting the redistrib*ted income in a lea6y b*c6et. !" : % -S): "nterpretive <. #$ : %0&% T(,: .tilitarianism

3riefly describe the three prominent schools of tho*ght in political philosophy. "dentify one of the most well& 6nown philosophers in each school.

ANS: According to *tilitarianism+ the government sho*ld choose policies to ma9imi4e the total *tility of society by attempting to achieve a more e/*al distrib*tion of income. 0eremy 3entham and 0ohn St*art -ill were the fo*nders. According to liberalism+ the government sho*ld choose policies deemed to be C*st+ as eval*ated by an impartial observer behind a Jveil of ignorance.J The main decision&ma6ing r*le is called the ma9imin criterion+ which says that the government sho*ld aim to ma9imi4e the well&being of the worst&off person in society. 0ohn #awls developed the liberalism philosophy in his boo6 A Theory of Justice. According to libertarianism+ the government sho*ld p*nish crimes and enforce vol*ntary agreements b*t not redistrib*te income that was fairly earned Dnot stolenE. 'ibertarians arg*e that society itself earns no incomeL only individ*al members of society earn income. #obert No4ic6 was a libertarian. !" : % -S): Analytical #$ : %0&% T(,: "ncome redistrib*tion

)hapter %0?"ncome "ne/*ality and ,overty

=. "ncome $1 $2 $3 $4 $5 $6 $7 $8 a. ,eter 15 29 42 54 65 75 84 92 ,a*l 32 61 87 110 130 147 161 172 -ary 20 38 54 68 80 90 98 103 0ane 16 30 42 52 60 66 70 72

;2

The table below reflects the levels of total utility received from income for each of fo*r members of a society.

b. c. ANS: a. b.

Ass*me that the society has the following income distrib*tion: ,eter @2 ,a*l @; -ary @8 0ane @2 "s it possible for the government to increase total aggregate *tility by redistrib*ting income among members of societyI $9plain yo*r answer. Ass*me that the government has @1= to allocate among the fo*r members of society. DAss*me that no one has any income to start with.E "f the government is interested in distrib*ting income in a way that ma9imi4es aggregate total *tility+ how sho*ld it distrib*te the @1= of incomeI !oes the table above describe a sit*ation characteri4ed by diminishing marginal *tilityI $9plain yo*r answer. No. "f a dollar is ta6en from anyone+ the possible net gain in *tility to any other person is less than or e/*al to the loss inc*rred by the person it is ta6en from. ,eter @5 ,a*l @; -ary @8 0ane @2 Kes. -arginal *tility declines as income increases for each person. #$ : %0&2 T(,: "ncome redistrib*tion

c.

!" : 2 -S): Analytical 10.

Ass*me that the government proposes a negative income ta9 that calc*lates ta9es owed by the following form*la+ Ta9es (wed M D1?2 "ncomeE & @10+000. )omp*te the ta9 that wo*ld be owed given each level of income. a. @1%0+000 b. @=0+000 c. @:0+000 d. @20+000 e. @0 ANS: a. b. c. d. e. @20+000 @%0+000 @10+000 @0 No ta9es will be owed. "nstead+ the family?person wo*ld receive a s*bsidy of @10+000 #$ : %0&2 T(,: Negative income ta9

!" : 2 -S): Analytical

;5
11.

)hapter %0?"ncome "ne/*ality and ,overty

Ass*me that the government proposes a negative income ta9 that calc*lates ta9es owed by the form*la+ Ta9es (wed M Da "ncomeE & b. A family with an income of @50+000 pays @8+000 in ta9es+ and a family with an income of @1%+000 receives an income s*bsidy of @%+000. a. >hat is the val*e for aI b. >hat is the val*e for bI c. >hat is the ta9 liability of a family with an income of @80+000I d. At what level of income will a family neither pay ta9es+ nor receive an income s*bsidyI a. b. c. d. 0.%8 or %8G @8+000 @;+800 @%0+000 #$ : %0&2 T(,: Negative income ta9

ANS:

!" : 2 -S): Analytical 1%.

$9plain what is meant by Jin&6ind transferJ programs. 3riefly o*tline the advantages and disadvantages of an in&6ind transfer program.

ANS: An in&6ind transfer program distrib*tes specific goods and services to individ*als who meet some criteria of need based on income. $9amples of s*ch programs incl*de food stamps+ -edicaid+ and the distrib*tion of toys and other presents d*ring the )hristmas season. Advocates of in&6ind transfers arg*e that s*ch transfers ens*re that the poor receive assistance that is foc*sed on basic needs s*ch as food and medical care. 3eca*se the programs are restrictive+ society is somewhat reass*red that recipients are not spending their benefits on *nprod*ctive addictions s*ch as alcohol. Advocates of cash payments arg*e that in&6ind transfers are inefficient beca*se the government does not 6now what goods and services the poor need most. !" : 1 -S): Applicative 12. #$ : %0&2 T(,: "n&6ind transfers

Ass*me yo* are a critic of welfare reforms that impose a time limit on the n*mber of years a person is eligible for welfare benefits. >hat is the fo*ndation of yo*r criti/*eI

ANS: The criti/*e is based on the premise that most people on welfare wo*ld not ma6e a JchoiceJ to p*rs*e a life on welfare if it were not thr*st *pon them. As s*ch+ we have an obligation to help them as long as there is demonstrated need. !" : 1 -S): Applicative 15. #$ : %0&2 T(,: >elfare

(*tline the possible wor6 disincentives created by anti&poverty programs. "s there a way to solve this problem witho*t ca*sing other forms of inefficiency to ariseI $9plain yo*r answer.

ANS: A high marginal ta9 rate e9ists on welfare transfers. There is inherently a trade&off between b*rdening the poor with a high effective marginal ta9 rate and b*rdening ta9payers with costly programs to red*ce poverty. !" : % -S): Analytical #$ : %0&2 T(,: >elfare

ec 00%%Income Inequality and Poverty

&ULTIPLE C!"ICE 1. A governmentHs policy of redistrib*ting income ma6es the income distrib*tion a. more e/*al+ distorts incentives+ alters behavior+ and ma6es the allocation of reso*rces more efficient. b. more e/*al+ distorts incentives+ alters behavior+ and ma6es the allocation of reso*rces less efficient. c. less e/*al+ distorts incentives+ alters behavior+ and ma6es the allocation of reso*rces more efficient. d. less e/*al+ distorts incentives+ alters behavior+ and ma6es the allocation of reso*rces less efficient.

)hapter %0?"ncome "ne/*ality and ,overty

ANS: 3 NAT: Analytic -S): Applicative %. !" : 1 #$ : '(): $fficiency and e/*ity %0&0 T(,: "ncome ine/*ality

;8

"n the .nited States+ labor earnings are what percent of total incomeI a. ;8 percent b. ;0 percent c. :8 percent d. 80 percent A !" : 1 #$ : %0&0 Analytic $fficiency and e/*ity 7 The st*dy of economics+ and definitions of economics "ncome ine/*ality -S): !efinitional >hich of the following is most li6ely to occ*r when the government enacts policies to ma6e the distrib*tion of income more e/*alI a. A more efficient allocation of reso*rces. b. A distortion of incentives. c. .nchanged behavior. d. All of the above are correct. !" : 1 #$ : '(): $fficiency and e/*ity %0&0 T(,: "ncome ine/*ality

ANS: NAT: '(): T(,: 2.

ANS: 3 NAT: Analytic -S): Applicative 5.

The invisible hand of the mar6etplace acts to allocate reso*rces a. efficiently b*t does not necessarily ens*re that reso*rces are allocated fairly. b. both fairly and efficiently. c. fairly b*t does not necessarily ens*re that reso*rces are allocated efficiently. d. neither fairly nor efficiently. !" : 1 #$ : '(): $fficiency and e/*ity %0&0 T(,: "ncome ine/*ality

ANS: A NAT: Analytic -S): Applicative 8.

The mar6etplace allocates reso*rces a. fairly. b. efficiently. c. to those desiring them least. d. both efficiently and e/*itably. !" : 1 #$ : '(): $fficiency and e/*ity %0&0 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): Applicative :.

>hen the government redistrib*tes income to achieve greater e/*ality+ it a. distorts incentives. b. improves efficiency. c. foc*ses on middle income brac6ets. d. relies on foreign aid to help balance the b*dget. !" : 1 #$ : '(): $fficiency and e/*ity %0&0 T(,: "ncome ine/*ality

ANS: A NAT: Analytic -S): "nterpretive ;.

1overnment programs that ta6e money from high&income people and give it to low&income people typically a. improve economic efficiency by red*cing poverty. b. red*ce economic efficiency beca*se they distort incentives. c. have no effect on economic efficiency beca*se they both red*ce poverty and distort incentives. d. sometimes improve+ sometimes red*ce+ and sometimes have no effect on economic efficiency. !" : % #$ : '(): $fficiency and e/*ity %0&0 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): "nterpretive

;:
<.

)hapter %0?"ncome "ne/*ality and ,overty

"n the ..S. economy+ labor earnings ma6e *p abo*t a. one&half of total income. b. two&thirds of total income. c. three&fo*rths of total income. d. nine&tenths of total income.

ANS: ) !" : 1 #$ : %0&0 NAT: Analytic '(): The st*dy of economics+ and definitions of economics T(,: "ncome 7 'abor -S): !efinitional =. >hen the government enacts policies to redistrib*te income+ a. the obCective is to enhance efficiency and a side effect is that the allocation of reso*rces becomes more e/*al. b. the obCective is to enhance efficiency and a side effect is that the allocation of reso*rces becomes less e/*al. c. the obCective is to enhance e/*ality and a side effect is that the allocation of reso*rces becomes more efficient. d. the obCective is to enhance e/*ality and a side effect is that the allocation of reso*rces becomes less efficient. !" : % #$ : '(): $fficiency and e/*ity %0&0 T(,: $fficiency 7 $/*ity

ANS: ! NAT: Analytic -S): "nterpretive 10.

>hich of the following is correctI a. 1overnments can never improve mar6et o*tcomes. b. 1overnments can sometimes improve mar6et o*tcomes. c. 1overnments can always improve mar6et o*tcomes. d. 1overnment can never ma6e the income distrib*tion more e/*al.

ANS: 3 !" : 1 #$ : %0&0 NAT: Analytic '(): The st*dy of economics+ and definitions of economics T(,: "ncome ine/*ality -S): !efinitional 11. >hich of the Ten Principles of Economics do governments r*n into when they redistrib*te income to achieve greater e/*alityI a. Trade can ma6e everyone better off. b. The cost of something is what yo* give *p to get it. c. ,eople face trade&offs. d. -ar6ets are *s*ally a good way to organi4e economic activity.

ANS: ) !" : 1 #$ : %0&0 NAT: Analytic '(): The st*dy of economics+ and definitions of economics T(,: Ten principles of economics -S): !efinitional 1%. >hich of the Ten Principles of Economics come into conflict with each other in this chapterI a. A co*ntryAs standard of living depends on its ability to prod*ce goods N ,eople face tradeoffs. b. ,rices rise when the government prints too m*ch money N 1overnments can sometimes improve mar6et o*tcomes. c. 1overnments can sometimes improve mar6et o*tcomes N ,eople face tradeoffs. d. ,eople face tradeoffs N ,rices rise when the government prints too m*ch money .

ANS: ) !" : 1 #$ : %0&0 NAT: Analytic '(): The st*dy of economics+ and definitions of economics T(,: Ten principles of economics -S): !efinitional

)hapter %0?"ncome "ne/*ality and ,overty

;;

ec 0'%%Income Inequality and Poverty The &ea(urement o) Inequality

&ULTIPLE C!"ICE 1. 1overnments enact policies to a. ma6e the distrib*tion of income more efficient. b. ma6e the distrib*tion of income more e/*al. c. ma9imi4e the *se of the welfare system. d. minimi4e the *se of in&6ind transfers. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): "nterpretive %.

A familyAs ability to b*y goods and services depends largely on its a. permanent income+ which is its normal+ or average+ income. b. permanent income+ which is the lowest ann*al income the family has received over a 10&year period. c. transitory income+ which is the meas*re of income *sed by the government to analy4e the distrib*tion of income and the poverty rate. d. transitory income+ which is its money income pl*s any in&6ind transfers it receives.

ANS: A !" : % #$ : %0&1 NAT: Analytic '(): The st*dy of economics+ and definitions of economics T(,: )ons*mption 7 "ncome -S): "nterpretive 2. >hich of the following is not a /*estion that economists try to answer when meas*ring the distrib*tion of incomeI a. Bow many people live in povertyI b. Bow often and how large are peopleAs raisesI c. Bow often do people move among income classesI d. >hat problems arise in meas*ring the amo*nt of ine/*alityI !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): Applicative 5.

$conomists st*dy poverty and income ine/*ality in order to answer which of the following /*estionsI a. >hat are peopleHs wagesI b. Bow does labor&force e9perience affect wagesI c. Bow m*ch ine/*ality is there in societyI d. Bow do people adC*st their behavior d*e to ta9ationI !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ) NAT: Analytic -S): Applicative 8.

)omparing the .nited States ho*sehold income distrib*tion to other co*ntries is a. easy+ beca*se data is available for all co*ntries in the world. b. easy+ beca*se some co*ntries collect data on e9pendit*res instead of incomes. c. problematic+ beca*se international agreements re/*ire co*ntries to standardi4e their income acco*nting proced*res. d. problematic+ beca*se co*ntries collect data in different ways. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ! NAT: Analytic -S): "nterpretive :.

The income distrib*tion in the .nited States shows that the income share of the top fifth of all families is a. over 80 percent. b. aro*nd %8 percent. c. more than 10 times the income of the bottom fifth. d. not m*ch different from the income of the top 8 percent.

;<

)hapter %0?"ncome "ne/*ality and ,overty

!" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ) NAT: Analytic -S): "nterpretive ;.

3ased on data from %008+ the top fifth of all families received appro9imately what percent of all income in the .nited StatesI a. ;< percent b. 5< percent c. %1 percent d. 5 percent !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): Applicative <.

3ased on ..S. income data from %008+ the bottom fifth of all families received appro9imately what percent of all incomeI a. 5< percent b. %1 percent c. 10 percent d. 5 percent !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ! NAT: Analytic -S): Applicative =.

3ased on ..S. income data from %008+ the top fifth of all families received a. the same share of income as the bottom fifth. b. twice as m*ch income as the bottom fifth. c. appro9imately 8 times more income than the bottom fifth. d. more than 10 times more income than the bottom fifth. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ! NAT: Analytic -S): Applicative 10.

..S. income data over the last seventy years s*ggests that the distrib*tion of income a. has grad*ally become more e/*al over the entire time period. b. has grad*ally become less e/*al over the entire time period. c. grad*ally became less e/*al *ntil abo*t 1=;0+ then became more e/*al from 1=;0 to %008. d. grad*ally became more e/*al *ntil abo*t 1=;0+ then became less e/*al from 1=;0 to %008. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ! NAT: Analytic -S): "nterpretive 11.

"n %008+ what percentage of ..S. families had income levels below @102+100I a. 8 percent b. %0 percent c. <0 percent d. =8 percent !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ) NAT: Analytic -S): Applicative 1%.

"n %002+ what percentage of ..S. families had income levels above @102+100I a. 8 percent b. %0 percent c. <0 percent d. =8 percent !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): Applicative

)hapter %0?"ncome "ne/*ality and ,overty

12. >hich of the following is not correctI a. ,overty is long&term problem for relatively few families. b. -eas*rements of income ine/*ality *s*ally do not incl*de in&6ind transfers. c. -eas*rements of income ine/*ality *se lifetime incomes rather than ann*al incomes. d. -eas*rements of income ine/*ality wo*ld be more meaningf*l if they reflected permanent rather than c*rrent income. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

;=

ANS: ) NAT: Analytic -S): Applicative 15.

>hich of the following represents a problem in meas*ring ine/*alityI a. -eas*rements of income distrib*tions typically incl*de in&6ind transfers+ which distort the meas*re of ine/*ality. b. A normal life&cycle pattern ca*ses ine/*ality in the income distrib*tion b*t may not reflect ine/*ality in living standards. c. Transitory income is a better meas*re of ine/*ality than permanent income. d. 3oth a and b are correct. !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): "nterpretive 18.

"f income were e/*ally distrib*ted among ho*seholds+ a. each ho*seholdHs relative share of income wo*ld increase. b. each ho*seholdHs relative share of income wo*ld decrease. c. the top fifth of ho*seholds wo*ld have 80 percent of the income. d. 80 percent of the ho*seholds wo*ld receive e9actly 80 percent of the income. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ! NAT: Analytic -S): "nterpretive 1:.

>hich of the following does not e9plain the rise in income ine/*ality from 1=;0 to %008I a. )hanges in technology. b. An increase in minim*m wages. c. A red*ction in the demand for *ns6illed labor. d. "ncreased international trade with low&wage co*ntries. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): "nterpretive 1;.

>hich of the following e9plains the rise in income ine/*ality from 1=;0 to %008I a. An increase in minim*m wages. b. An increase in the demand for s6illed labor. c. An increase in the demand for *ns6illed labor. d. #ed*ced international trade with low&wage co*ntries. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): "nterpretive Table 20-1 *roup Top O*artile D%8GE Second O*artile Third O*artile 3ottom O*artile

Annual Family Income @<8+000 and over @80+000 to @<5+=== @%<+000 to @5=+=== .nder @%<+000

<0
1<.

)hapter %0?"ncome "ne/*ality and ,overty

Re)er to Ta+le 20%', Seventy&five percent of all families have incomes below what levelI a. @%<+000 b. @80+000 c. @<8+000 d. There is ins*fficient information to answer this /*estion. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ) NAT: Analytic -S): "nterpretive 1=.

Re)er to Ta+le 20%', ifty percent of all families have incomes below what levelI a. @%<+000 b. @80+000 c. @<8+000 d. There is ins*fficient information to answer this /*estion. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): "nterpretive %0.

>hen we compare the income distrib*tion of the .nited States to those of other co*ntries+ we find that the ..S. a. has one of the most *ne/*al income distrib*tions. b. has one of the most e/*al income distrib*tions. c. ran6s in the middle of the gro*p. d. is second to )hina as the most *ne/*al distrib*tion. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ) NAT: Analytic -S): "nterpretive

Table 20-2 ,ercentage of 3efore&Ta9 "ncome #eceived by amilies in Bapland *roup Percenta-e o) Percenta-e o) Family Income Family Income in 2000 in './0 Top ifth 80.; 58.= o*rth ifth %:.= %8.< -iddle ifth 1%.1 12.: Second ifth :.% ;.% 3ottom ifth 5.1 8.8 %1. Re)er to Ta+le 20%2, According to the table+ from 1=80 to %000+ Bapland income distrib*tion became a. less e/*al. b. more e/*al. c. more e/*al at the lowest level of income b*t less e/*al at highest level of income. d. less e/*al at the lowest level of income b*t more e/*al at highest level of income. !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: A NAT: Analytic -S): Applicative

Table 20-3 The !istrib*tion of "ncome in Bapland *roup Annual Family Income Top ifth @1%0+000 and over o*rth ifth @=0+000 & 11=+=== -iddle ifth @:0+000 & <=+=== Second ifth @58+000 & 8=+=== 3ottom ifth .nder @58+000

)hapter %0?"ncome "ne/*ality and ,overty

%%.

<1

Re)er to Ta+le 20%0, According to the table+ what percent of families in Bapland have income levels below @=0+000I a. %0 percent. b. 50 percent. c. :0 percent. d. <0 percent. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ) NAT: Analytic -S): Applicative %2.

Re)er to Ta+le 20%0, According to the table+ what percent of families in Bapland have income levels above @:0+000I a. <0 percent b. :0 percent c. 80 percent d. 50 percent !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): Applicative %5.

Re)er to Ta+le 20%0, >here wo*ld the government in Bapland set the poverty line to have a poverty rate of 50 percentI a. @58+000. b. @:0+000. c. @=0+000. d. @1%0+000. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: 3 NAT: Analytic -S): Applicative %8.

The co*ntry that has the highest degree of income ine/*ality is a. 0apan. b. 3ra4il. c. So*th Africa. d. the .nited States. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): "nterpretive %:.

The co*ntry that has the most income e/*ality is a. 0apan. b. 3ra4il. c. So*th Africa. d. the .nited States. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: A NAT: Analytic -S): "nterpretive %;.

The .nited States has more income ine/*ality than a. 3ra4il. b. -e9ico. c. )anada. d. So*th Africa. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ) NAT: Analytic -S): "nterpretive

<%
%<.

)hapter %0?"ncome "ne/*ality and ,overty

The .nited States has less income ine/*ality than a. 0apan. b. )anada. c. 1ermany. d. So*th Africa. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ! NAT: Analytic -S): "nterpretive %=.

(n average+ the distrib*tion of income tends to be a. random across richer and poorer co*ntries. b. similar between richer and poorer co*ntries. c. less e/*al in richer co*ntries than in poorer co*ntries. d. more e/*al in richer co*ntries than in poorer co*ntries. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ! NAT: Analytic -S): Applicative 20.

The .nited States has relatively greater income a. ine/*ality than developing co*ntries b*t greater e/*ality than other developed co*ntries. b. ine/*ality than both developing and other developed co*ntries. c. e/*ality than developing co*ntries b*t greater ine/*ality than other developed co*ntries. d. e/*ality than both developing and other developed co*ntries. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ) NAT: Analytic -S): "nterpretive 21.

>hen we e9amine historical data on income ine/*ality in the ..S.+ we see that the distrib*tion of income grad*ally became a. more e/*al between 1=28 and %008. b. more e/*al between 1=28 and 1=;2+ b*t that trend reversed itself between 1=;2 and %008. c. more *ne/*al between 1=28 and 1=;2+ b*t that trend reversed itself between 1=;2 and %008. d. more *ne/*al between 1=28 and %008. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): "nterpretive 2%.

The %008 ..S. distrib*tion of income shows that the top fifth of all families have a. more than ten times the income of the bottom %0 percent. b. more than five times the income of the bottom %0 percent. c. more than do*ble the income of the bottom %0 percent. d. the same share of income as the bottom %0 percent. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: A NAT: Analytic -S): Applicative 22.

The %008 ..S. distrib*tion of income shows that the top 8 percent of families have appro9imately what share of incomeI a. 1 percent b. 8 percent c. 10 percent d. %0 percent !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ! NAT: Analytic -S): Applicative

)hapter %0?"ncome "ne/*ality and ,overty

25. The st*dy by economists )o9 and Alm fo*nd that the %00: pre&ta9 income of the richest fifth of ..S. ho*seholds is a. 8 times the pre&ta9 income of the poorest fifth. b. 10 times the pre&ta9 income of the poorest fifth. c. 18 times the pre&ta9 income of the poorest fifth. d. %0 times the pre&ta9 income of the poorest fifth. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

<2

ANS: ) NAT: Analytic -S): Applicative 28.

The st*dy by economists )o9 and Alm fo*nd that the %00: after&ta9 income of the richest fifth of ..S. ho*seholds is a. e/*al to the after&ta9 income of the poorest fifth. b. ; times the after&ta9 income of the poorest fifth. c. 15 times the after&ta9 income of the poorest fifth. d. %1 times the after&ta9 income of the poorest fifth. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ) NAT: Analytic -S): Applicative 2:.

The st*dy by economists )o9 and Alm fo*nd a. ine/*ality in cons*mption is m*ch smaller than ine/*ality in ann*al income. b. ine/*ality in cons*mption is slightly smaller than ine/*ality in ann*al income. c. ine/*ality in cons*mption is slightly larger than ine/*ality in ann*al income. d. ine/*ality in cons*mption is m*ch larger than ine/*ality in ann*al income. !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: A NAT: Analytic -S): Applicative 2;.

The st*dy by economists )o9 and Alm fo*nd a. the gap between rich and poor shrin6s greatly if *sing after&ta9 income compared with pre&ta9 income. b. the gap between rich and poor shrin6s slightly if *sing after&ta9 income compared with pre&ta9 income. c. the gap between rich and poor widens slightly if *sing after&ta9 income compared with pre&ta9 income. d. the gap between rich and poor widens greatly if *sing after&ta9 income compared with pre&ta9 income. !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): Applicative 2<.

$conomist Tyler )owen attrib*tes increased income ine/*ality to a. lower income ine/*ality among older pop*lations than yo*nder pop*lations. b. lower in&6ind transfers made by governments. c. a larger n*mber of ed*cated people in the ..S. pop*lation. d. the development of the internet. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ) NAT: Analytic -S): Applicative 2=.

>hich of the following is not a reason given by economist Tyler )owen for increased income ine/*alityI a. Bigher income ine/*ality among older pop*lations than yo*nger pop*lations. b. 'ower in&6ind transfers made by governments. c. A larger n*mber of ed*cated people in the ..S. pop*lation. d. The increasing n*mbers of older people in the ..S. pop*lation overall. !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: 3 NAT: Analytic -S): Applicative

<5
50.

)hapter %0?"ncome "ne/*ality and ,overty

>hich of the following is not disc*ssed by economist Tyler )owen as an alternative to meas*ring ine/*ality by incomeI a. 'eis*re. b. Bappiness. c. )ons*mption. d. Age. !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ! NAT: Analytic -S): Applicative 51.

>hen comparing the percentage of income Dor e9pendit*reE of the lowest and highest %0 percent of the pop*lation+ a. So*th Africa has a more e/*al income distrib*tion than the .nited States. b. So*th Africa has a more e/*al income distrib*tion than 0apan. c. 0apan has a more e/*al income distrib*tion than the .nited States. d. -e9ico has a more e/*al income distrib*tion than )anada. !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: ) NAT: Analytic -S): Applicative 5%.

Since abo*t 1=;0 in the ..S.+ a. decreases in the wages of *ns6illed wor6ers+ relative to s6illed wor6ers+ have led to increased ine/*ality in family incomes. b. increases in the wages of *ns6illed wor6ers+ relative to s6illed wor6ers+ have led to increased e/*ality in family incomes. c. ine/*ality in family incomes has increased+ despite increases in the wages of *ns6illed wor6ers relative to s6illed wor6ers. d. ine/*ality in family incomes has decreased+ despite increases in the wages of s6illed wor6ers relative to *ns6illed wor6ers. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "ncome ine/*ality

ANS: A NAT: Analytic -S): "nterpretive 52.

The normal life cycle pattern of income a. contrib*tes to more ine/*ality in the distrib*tion of ann*al income and to more ine/*ality in living standards. b. contrib*tes to more ine/*ality in the distrib*tion of ann*al income+ b*t it does not necessarily contrib*te to more ine/*ality in living standards. c. contrib*tes to less ine/*ality in the distrib*tion of ann*al income and to less ine/*ality in living standards. d. has no effect on either the distrib*tion of ann*al income or on living standards.

ANS: 3 !" : % #$ : %0&1 NAT: Analytic '(): The st*dy of economics+ and definitions of economics T(,: "ncome ine/*ality 7 Standard of living -S): "nterpretive 55. The poverty rate is based on a familyAs a. income+ in&6ind transfers+ and other government aid. b. income and in&6ind transfers. c. in&6ind transfers only. d. income only. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate

ANS: ! NAT: Analytic -S): !efinitional 58.

The poverty rate is a meas*re of the percentage of people whose incomes fall below a. a relative level of income. b. an absol*te level of income. c. the median income for a family of three. d. the bottom %0 percent of the income distrib*tion.

)hapter %0?"ncome "ne/*ality and ,overty

ANS: 3 NAT: Analytic -S): !efinitional 5:. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate

<8

The poverty rate is a. a meas*re of income ine/*ality across families. b. the percentage of the pop*lation whose family income falls below a specified level. c. an absol*te level of income set by the federal government for each family si4e. d. meas*red by the n*mber of in&6ind transfers that a family receives. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate

ANS: 3 NAT: Analytic -S): !efinitional 5;.

"n %008+ the poverty rate in the .nited States was a. %.8 percent. b. 1%.: percent. c. 11.1 percent. d. %%.5 percent. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate

ANS: 3 NAT: Analytic -S): Applicative 5<.

(ver the past 80 years+ the ..S. poverty rate was at its lowest level in a. 1=;2. b. 1=<0. c. 1==0. d. %008. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate

ANS: A NAT: Analytic -S): "nterpretive 5=.

A commonly&*sed ga*ge of poverty is the a. income ine/*ality rate. b. average income rate. c. poverty rate. d. social ine/*ality rate. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate

ANS: ) NAT: Analytic -S): Applicative 80.

3ased on ..S. data for %008+ the poverty rate is the highest for which gro*p of peopleI a. children b. married co*ples c. female ho*seholds+ no spo*se present d. the elderly !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate

ANS: ) NAT: Analytic -S): Applicative 81.

The percentage of families with incomes below the poverty line a. is defined as the 10 percent of ..S.ho*seholds with the lowest incomes. b. is 6nown as the poverty rate. c. is 6nown as the *nemployment rate. d. rises as the general income level rises. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate

ANS: 3 NAT: Analytic -S): !efinitional

<:
8%.

)hapter %0?"ncome "ne/*ality and ,overty

-eas*res of poverty that fail to acco*nt for the val*e of in&6ind transfers a. *nderstate the act*al poverty rate. b. have little effect on the validity of reported poverty rates. c. are generally more reliable meas*res of act*al poverty rates. d. overstate the act*al poverty rate.

ANS: ! !" : 1 #$ : %0&1 NAT: Analytic '(): $fficiency and e/*ity T(,: ,overty rate 7 "n&6ind transfers -S): "nterpretive 82. Since the early 1=;0s+ average incomes have a. increased+ which has red*ced the poverty rate. b. increased+ while the poverty rate increased slightly. c. decreased+ while the poverty rate has remained *nchanged. d. remained *nchanged+ while the poverty rate has decreased. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate 7 "ncome

ANS: 3 NAT: Analytic -S): Applicative 85.

"n %008+ the poverty rate in the .nited States was 1%.: percent. This means that 1%.: percent a. of the pop*lation had a total family income that fell below the poverty line. b. of the pop*lation had a total family income that was above the poverty line. c. of the pop*lation had a total family income below @10+000. d. of the pop*lation had a total family income above @80+000. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate

ANS: A NAT: Analytic -S): "nterpretive 88.

The poverty line in the co*ntry of "ne/*alia is @10+000. The distrib*tion of income for "ne/*alia is as follows: "ncome less than @8+000 between @8+000 and @10+000 between @10+000 and @18+000 between @18+000 and @%0+000 over @%0+000

N*mber of amilies %00 200 800 ;00 100 The poverty rate in "ne/*alia is a. 11.1 percent. b. 1:.; percent. c. %;.< percent. d. 88.8 percent. ANS: ) NAT: Analytic -S): Analytical 8:.

!" : 2 #$ : '(): $fficiency and e/*ity

%0&1 T(,: ,overty rate

The distrib*tion of income for "ne/*alia is as follows: "ncome less than @8+000 between @8+000 and @10+000 between @10+000 and @18+000 between @18+000 and @%0+000 over @%0+000

N*mber of amilies %00 200 800 ;00 100

)hapter %0?"ncome "ne/*ality and ,overty

>hat wo*ld the poverty line need to be to have a poverty rate of %;.< percent in "ne/*aliaI a. @8+000. b. @10+000. c. @18+000. d. @%0+000. ANS: 3 NAT: Analytic -S): Analytical 8;. !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate 7 ,overty line

<;

The poverty line in the co*ntry of 1rim is @10+000. The distrib*tion of income for 1rim is as follows: "ncome less than @8+000 between @8+000 and @10+000 between @10+000 and @18+000 between @18+000 and @%0+000 over @%0+000

N*mber of amilies 800 1+000 1+000 500 100 The poverty rate in 1rim is a. 8 percent. b. 1:.; percent. c. 80 percent. d. <2.2 percent. ANS: ) NAT: Analytic -S): Analytical 8<.

!" : 2 #$ : '(): $fficiency and e/*ity

%0&1 T(,: ,overty rate

The distrib*tion of income for 1rim is as follows: "ncome less than @8+000 between @8+000 and @10+000 between @10+000 and @18+000 between @18+000 and @%0+000 over @%0+000

N*mber of amilies 800 1+000 1+000 500 100

>here wo*ld the government in 1rim set the poverty line to establish a poverty rate of 80 percentI a. @8+000. b. @10+000. c. @18+000. d. @%0+000. ANS: 3 NAT: Analytic -S): Analytical 8=. !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate 7 ,overty line

The distrib*tion of income for !anville is as follows: "ncome less than @18+000 between @18+000 and @%0+000 between @%0+000 and @%8+000 between @%8+000 and @20+000 over @20+000

N*mber of amilies 800 :00 1+000 ;00 800

<<

)hapter %0?"ncome "ne/*ality and ,overty

>here wo*ld the government in !anville set the poverty line to establish a poverty rate of 22.2 percentI a. @18+000. b. @%0+000. c. @%8+000. d. @20+000. ANS: 3 NAT: Analytic -S): Analytical :0. !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate 7 ,overty line

The poverty line in the co*ntry of Abbyville is @18+000. The distrib*tion of income for Abbyville is as follows: "ncome less than @18+000 between @18+000 and @%0+000 between @%0+000 and @%8+000 between @%8+000 and @20+000 over @20+000

N*mber of amilies 200 800 =00 :00 %00 The poverty rate in Abbyville is a. 1% percent. b. 2% percent. c. 80 percent. d. :< percent. ANS: A NAT: Analytic -S): Analytical :1.

!" : 2 #$ : '(): $fficiency and e/*ity

%0&1 T(,: ,overty rate

The distrib*tion of income for Abbyville is as follows: "ncome less than @18+000 between @18+000 and @%0+000 between @%0+000 and @%8+000 between @%8+000 and @20+000 over @20+000

N*mber of amilies 200 800 =00 :00 %00

>here wo*ld the government in Abbyville set the poverty line to generate a poverty rate of 1% percentI a. @18+000. b. @%0+000. c. @%8+000. d. @20+000. ANS: A NAT: Analytic -S): Analytical :%. !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty rate 7 ,overty line

"n %008+ the poverty line for a family of fo*r in the ..S. was a. @8:+1=5. b. @%<+0=;. c. @1=+=;1. d. @1%+:02. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: ) NAT: Analytic -S): Applicative

)hapter %0?"ncome "ne/*ality and ,overty

:2. The poverty line is adC*sted each year to reflect changes in the a. n*mber of people c*rrently on p*blic assistance. b. level of prices. c. n*tritional content of an Jade/*ateJ diet. d. si4e of a family. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

<=

ANS: 3 NAT: Analytic -S): !efinitional :5.

The federal government sets the poverty line at ro*ghly a. five times the cost of providing an ade/*ate diet. b. fo*r times the cost of providing an ade/*ate diet. c. three times the cost of providing an ade/*ate diet. d. two times the cost of providing an ade/*ate diet. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: ) NAT: Analytic -S): !efinitional :8.

The income level below which families are said to be poor is 6nown as the a. income maintenance threshold. b. poverty line. c. bottom /*intile of the income distrib*tion. d. minim*m wage. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: 3 NAT: Analytic -S): !efinitional ::.

The poverty rate is the percentage of the pop*lation that have a family income level below the a. income maintenance threshold. b. poverty line. c. bottom /*intile of the income distrib*tion. d. minim*m wage. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: 3 NAT: Analytic -S): !efinitional :;.

"f the ..S. government determines that the cost of feeding an *rban family of si9 is @:+000 per year+ then the official poverty line for a family of that type is a. @:+000. b. @1%+000. c. @1<+000. d. @2:+000. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: ) NAT: Analytic -S): Applicative :<.

"f the ..S. government determines that the cost of feeding an *rban family of fo*r is @8+%00 per year+ then the official poverty line for a family of that type is a. @10+500. b. @18+:00. c. @%0+<00. d. @%:+000. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: 3 NAT: Analytic -S): Applicative

=0
:=.

)hapter %0?"ncome "ne/*ality and ,overty

The .S government sets the poverty line e/*al to appro9imately a. three times the cost of providing s*bsidi4ed ho*sing. b. three times the cost of providing an ade/*ate diet. c. the minim*m wage for a single person wor6ing 50 ho*rs per wee6 and 80 wee6s per year. d. the cost of providing food+ shelter+ and health care e9penses for a family of fo*r. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: 3 NAT: Analytic -S): Applicative ;0.

The calc*lation of the poverty line incl*des adC*stments for a. energy costs. b. child care costs. c. the level of prices. d. the $arned "ncome Ta9 )redit. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: ) NAT: Analytic -S): "nterpretive ;1.

>hich of the following statements is not correctI a. The poverty line is an absol*te level of income set by the federal government below which a family is considered to be in poverty. b. The poverty line is appro9imately e/*al to three times the cost of providing an ade/*ate diet. c. The poverty line is adC*sted ann*ally to reflect changes in price levels. d. The poverty line is adC*sted semiann*ally to reflect changes in f*el prices. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: ! NAT: Analytic -S): !efinitional ;%.

,overty is fo*nd to be correlated with a. age and race b*t not family composition. b. race only. c. race and family composition b*t not age. d. age+ race+ and family composition. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty

ANS: ! NAT: Analytic -S): Applicative ;2.

-eas*ring poverty *sing an absol*te income scale li6e the poverty line can be misleading beca*se a. income meas*res do not incl*de the val*e of in&6ind transfers. b. money is more highly val*ed by the poor than by the rich. c. the poor are not li6ely to participate in the labor mar6et. d. income meas*res are not adC*sted for the effects of labor&mar6et discrimination. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty

ANS: A NAT: Analytic -S): "nterpretive ;5.

>hich of the following statements is correctI a. The poverty line is a relative standard. b. $conomic growth that raises all incomes will decrease the n*mber of families in poverty. c. "ncreasing income ine/*ality red*ces poverty. d. $conomic growth+ by definition+ affects all families e/*ally. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty

ANS: 3 NAT: Analytic -S): Analytical

)hapter %0?"ncome "ne/*ality and ,overty

;8. >hich of the following gro*ps has the highest poverty rateI a. 3lac6s. b. Asians. c. )hildren D*nder age 1<E. d. emale&headed ho*seholds. !" : 1 #$ : %0&1 '(): The st*dy of economics+ and definitions of economics -S): Applicative

=1

ANS: ! NAT: Analytic T(,: ,overty ;:.

>hich of the following is not correctI a. ,overty is correlated with race. b. ,overty is correlated with age. c. ,overty is correlated with family composition. d. ,overty is correlated with co*ntry of origin. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty

ANS: ! NAT: Analytic -S): Applicative ;;.

"n comparison to the average poverty rate+ a. children and the elderly are more li6ely to be poor. b. children and the elderly are less li6ely to be poor. c. children are more li6ely to be poor+ b*t the elderly are less li6ely to be poor. d. children are less li6ely to be poor+ b*t the elderly are more li6ely to be poor. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty

ANS: ) NAT: Analytic -S): Applicative

Table 20-4 Poverty Thre(hold( in 20021 +y i2e o) Family and #um+er o) Related Children Under '3 4ear( 56ollar(7
Related children under 18 years Three Four Five Six

Size of family unit One erson !unrelated individual" #nder $% years $% years and over Two ersons *ouseholder under $% years *ouseholder $% years and over Three ersons Four ersons Five ersons Six ersons Seven ersons Eight ersons Nine ersons or more

None

One

Two

Seven Eight or more

&'(%& 8'$)8 1)'+,- 1)',++ 1+'8-, 1)'(%( 1,'+-) 18'%%$ ))'(-)%'-(8 )&'$1% (('1)1 (&'8,( 1,',8+ 18'8%& ))'-+( )%'8,+ )&'-&& ((',1, ,+'+($ 1,',&, 18'),, ))'++)%'(+)&'1$) ()'81) (&'%+, 18'(+)1',$& ),'-&)8'-18 ()')8% (&'+%-

)1'1,1 ),'+(8 )-'8&+ (1'%(8 (8'()(

)('%88 )$'&), )%'8$% (+'%8& )&'$+1 )&'(%+ (-'(1( ($'(&& ($'1-( (,'-8+

So*rce: .. S. 3*rea* of the )ens*s+ )*rrent ,op*lation S*rvey. ;<. Re)er to Ta+le 20%8. >hat is the poverty line for a family of si9 with three childrenI a. @%1+5:= b. @%5+;=; c. @%8+;2< d. @%<+;1< !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: 3 NAT: Analytic -S): Applicative

=%
;=.

)hapter %0?"ncome "ne/*ality and ,overty

Re)er to Ta+le 20%8. >hat is the poverty line for a family of eight with two childrenI a. @15+5=5 b. @2%+<1% c. @22+1%1 d. @25+;<0 !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: 3 NAT: Analytic -S): Applicative <0.

Re)er to Ta+le 20%8. >hat is the poverty line for a family of three with one childI a. @1%+0;% b. @1%+500 c. @15+5<0 d. @15+5=5 !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: ) NAT: Analytic -S): Applicative <1.

Re)er to Ta+le 20%8. >hat is the poverty line for a ;8 year old individ*alI a. @<+:%< b. @=+28= c. @1%+282 d. @1%+500 !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: A NAT: Analytic -S): Applicative <%.

Re)er to Ta+le 20%8. >hat is the poverty line for a family with one 28&year&old ad*lt and one childI a. @<+:%< b. @=+28= c. @1%+282 d. @1%+500 !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: ,overty line

ANS: ! NAT: Analytic -S): Applicative

)hapter %0?"ncome "ne/*ality and ,overty

Figure 20-1 Number of Poor

=2

<2.

Re)er to Fi-ure 20%'. The absol*te n*mber of people in poverty a. is higher in %001 than in 1=8=. b. is lower in %001 than in 1=8=. c. has not changed between 1=8= and %001. d. has steadily decreased between 1=8= and %001. !" : % #$ : %0&1 '(): #eading and interpreting graphs T(,: ,overty

ANS: 3 NAT: Analytic -S): "nterpretive <5.

Re)er to Fi-ure 20%'. 3etween 1=:8 and %001+ d*ring recessions Dthe shaded barsE the n*mber of individ*als in poverty has a. increased. b. decrease. c. not changed. d. decreased and then increased. !" : % #$ : %0&1 '(): #eading and interpreting graphs T(,: ,overty

ANS: A NAT: Analytic -S): "nterpretive <8.

Re)er to Fi-ure 20%'. 3etween 1=8= and %001 the poverty rate has a. increased. b. decreased. c. stayed the same. d. moved in the opposite direction of the n*mber of people in poverty. !" : % #$ : %0&1 '(): #eading and interpreting graphs T(,: ,overty rate

ANS: 3 NAT: Analytic -S): "nterpretive

=5

)hapter %0?"ncome "ne/*ality and ,overty

Figure 20-2 Poverty Rates by Age

<:.

Re)er to Fi-ure 20%2. "n %001+ the percent of children *nder age 1< in poverty is a. higher than both the percentage of ad*lts aged 1< to :5 and the percentage of elderly aged :8 years and over in poverty. b. higher than the percentage of ad*lts aged 1< to :5 b*t is lower than the percentage of elderly aged :8 years and over in poverty. c. lower than both the percentage of ad*lts aged1< to :5 and the percentage of elderly aged :8 years and over in poverty. d. lower than the percentage of ad*lts aged 1< to :5 b*t is higher than the percentage of elderly aged :8 years and over in poverty. !" : % #$ : %0&1 '(): #eading and interpreting graphs T(,: ,overty

ANS: A NAT: Analytic -S): "nterpretive <;.

Re)er to Fi-ure 20%2. "n 1=:<+ the percent of ad*lts aged 1< to :5 years in poverty is a. higher than both the percentage of children *nder age 1< and the percentage of elderly aged :8 and over in poverty. b. higher than the percentage of children *nder age 1< b*t is lower than the percentage of elderly aged :8 and over in poverty. c. is lower than both the percentage of children *nder age 1< and the percentage of elderly aged :8 and over in poverty. d. is lower than the percentage of children *nder age 1< b*t is higher than the percentage of elderly aged :8 and over in poverty. !" : % #$ : %0&1 '(): #eading and interpreting graphs T(,: ,overty

ANS: ) NAT: Analytic -S): "nterpretive <<.

Re)er to Fi-ure 20%2. "n %001+ the percent of ad*lts between aged 1< and :5 in poverty is a. higher than both the percentage of children *nder age 1< and the percentage of elderly aged :8 and over in poverty. b. higher than the percentage of children *nder age 1< b*t is lower than the percentage of elderly aged :8 and over in poverty. c. is lower than both the percentage of children *nder age 1< and the percentage of elderly aged :8 and over in poverty. d. is lower than the percentage of children *nder age 1< and is e/*al to the percentage of elderly aged :8 and over in poverty.

)hapter %0?"ncome "ne/*ality and ,overty

ANS: ! NAT: Analytic -S): "nterpretive <=. !" : % #$ : %0&1 '(): #eading and interpreting graphs T(,: ,overty

=8

Re)er to Fi-ure 20%2, "n 1=:<+ the percent of children *nder age 1< in poverty is a. higher than both the percentage of ad*lts aged 1< to :5 and the percentage of elderly aged :8 and over in poverty. b. higher than the percentage of ad*lts aged 1< to :5 b*t is lower than the percentage of elderly aged :8 and over in poverty. c. lower than both the percentage of ad*lts aged 1< to :5 and the percentage of elderly aged :8 and over in poverty. d. lower than the percentage of ad*lts aged 1< to :5 b*t is higher than the percentage of elderly aged :8 and over in poverty. !" : % #$ : %0&1 '(): #eading and interpreting graphs T(,: ,overty

ANS: 3 NAT: Analytic -S): "nterpretive =0.

Re)er to Fi-ure 20%2. "n 1=:<+ the percent of elderly aged :8 and over in poverty is a. higher than both the percentage of ad*lts aged 1< to :5 and the percentage of children *nder age 1< in poverty. b. higher than the percentage of ad*lts aged 1< to :5 b*t is lower than the percentage of children *nder age 1< in poverty. c. lower than both the percentage of ad*lts aged 1< to :5 and the percentage of children *nder age 1< in poverty. d. is lower than the percentage of ad*lts aged 1< to :5 b*t is higher than the percentage of children *nder age 1< in poverty. !" : % #$ : %0&1 '(): #eading and interpreting graphs T(,: ,overty

ANS: A NAT: Analytic -S): "nterpretive =1.

Re)er to Fi-ure 20%2. "n %001+ the percent of elderly aged :8 and over in poverty is a. higher than both the percentage of ad*lts aged 1< to :5 and the percentage of children *nder age 1< in poverty. b. higher than the percentage of ad*lts aged 1< to :5 b*t is lower than the percentage of children *nder age 1< in poverty. c. lower than both the percentage of ad*lts aged 1< to :5 and the percentage of children *nder age 1< in poverty. d. lower than the percentage of children *nder age 1< b*t is e/*al to the percentage of ad*lts aged 1< to :5 in poverty. !" : % #$ : %0&1 '(): #eading and interpreting graphs T(,: ,overty

ANS: ! NAT: Analytic -S): "nterpretive =%.

Re)er to Fi-ure 20%2. rom 1=:= to %001+ the percent of elderly aged :5 and over in poverty has a. declined+ while the percentage of children *nder age 1< in poverty has also declined. b. declined+ while the percentage of children *nder age 1< in poverty has increased. c. increased+ while the percentage of children *nder age 1< in poverty has declined. d. increased+ while the percentage of children *nder age 1< in poverty has also increased. !" : % #$ : %0&1 '(): #eading and interpreting graphs T(,: ,overty

ANS: 3 NAT: Analytic -S): "nterpretive =2.

"f the val*e of in&6ind transfers are ta6en into acco*nt+ the n*mber of families living in poverty in the .nited States wo*ld a. increase by abo*t 1 percent. b. decrease by abo*t 1 percent. c. decrease by abo*t 8 percent. d. decrease by abo*t 10 percent.

=:

)hapter %0?"ncome "ne/*ality and ,overty

!" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "n&6ind transfers

ANS: ! NAT: Analytic -S): Applicative =5.

>hich of the following is not an e9ample of in&6ind transfersI a. ood stamps. b. -edicare. c. The $arned "ncome Ta9 )redit. d. Bo*sing vo*chers. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 7 %0&2 T(,: "n&6ind transfers

ANS: ) NAT: Analytic -S): Applicative =8.

"n&6ind transfers are a. obtained only by those who have political connections. b. provided only by the .. S. government. c. non&monetary items given to the poor. d. obtained primarily thro*gh so*p 6itchens and private charities. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "n&6ind transfers

ANS: ) NAT: Analytic -S): !efinitional =:.

1overnment vo*chers to p*rchase food+ also 6nown as food stamps+ are an e9ample of a. an in&6ind transfer. b. life&cycle income. c. a negative income ta9. d. permanent income. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "n&6ind transfers

ANS: A NAT: Analytic -S): !efinitional =;.

"n&6ind transfers are transfers to the poor a. in the form of goods and services rather than cash. b. in the form of goods+ services+ and cash. c. from private charitable organi4ations only. d. from the federal government only. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: "n&6ind transfers

ANS: A NAT: Analytic -S): !efinitional =<.

The statement that Jmeas*res of the distrib*tion of income are based on money incomeJ relates to which problem in meas*ring ine/*alityI a. "n&6ind transfers. b. $conomic life cycle. c. Transitory vers*s permanent income. d. $conomic mobility. !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: "n&6ind transfers

ANS: A NAT: Analytic -S): "nterpretive ==.

"n the .nited States+ a typical wor6erHs income pea6s aro*nd age a. ;0. b. :0. c. 80. d. 50. !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

ANS: ) NAT: Analytic -S): Applicative

)hapter %0?"ncome "ne/*ality and ,overty

100. ,eople have their highest saving rates when they are a. retired. b. middle&aged. c. married with yo*ng children. d. yo*ng and single. ANS: 3 NAT: Analytic -S): Applicative !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

=;

101. The reg*lar pattern of income variation over a personHs life is called a. the earned income cycle. b. the s*bstit*tion effect. c. the life cycle. d. the pattern of change. ANS: ) NAT: Analytic -S): !efinitional !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

10%. A familyHs ability to b*y goods and services depends largely on its a. in&6ind transfers. b. ann*al income. c. transitory income. d. permanent income. ANS: ! NAT: Analytic -S): Applicative !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

102. $conomists who st*dy economic mobility have fo*nd that+ if a father earns %0 percent above his generationHs average income+ his son will most li6ely earn a. an income e/*al to his generationHs average income. b. < percent above his generationHs average income. c. 8 percent below his generationHs average income. d. 2 percent above his generationHs average income. ANS: 3 NAT: Analytic -S): Applicative !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic mobility

105. >hat percentage of millionaires in the .nited States are self&madeI a. %0 percent b. 50 percent c. :0 percent d. <0 percent ANS: ! !" : 1 #$ : %0&1 NAT: Analytic '(): The st*dy of economics+ and definitions of economics T(,: $conomic mobility -S): !efinitional 108. $conomic mobility in the .nited States is a. *ncommon. (ver 80 percent of poor families remain poor for < or more years. b. *ncommon. (ver ;8 percent of poor families remain poor for < or more years. c. common. ewer than 2 percent of poor families remain poor for < or more years. d. common. ewer than 1 percent of poor families remain poor for < or more years. ANS: ) NAT: Analytic -S): Applicative !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic mobility

=<

)hapter %0?"ncome "ne/*ality and ,overty

10:. $conomists who st*dy economic mobility have fo*nd that the income of a grandfather and his grandsonHs income are a. not closely related. b. negatively related. c. directly related. d. e/*al. ANS: A NAT: Analytic -S): "nterpretive !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic mobility

10;. S*san won @%+000 at the blac6Cac6 tables on her birthday. Ber winnings are an e9ample of a. permanent income. b. life&cycle income. c. transitory income. d. an in&6ind transfer. ANS: ) NAT: Analytic -S): Applicative !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

10<. >hich of the following statements is correctI a. The distrib*tion of ann*al income acc*rately reflects the distrib*tion of living standards. b. ,ermanent incomes are more e/*ally distrib*ted than ann*al incomes. c. Transitory changes in income generally have a significant impact on a familyHs standard of living. d. Ann*al income is more e/*ally distrib*ted than permanent income. ANS: 3 NAT: Analytic -S): "nterpretive !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

10=. >hich of the following is correctI a. "ncomes tend to be high for yo*ng wor6ers. b. "ncomes tend to rise sharply at retirement. c. "ncomes tend to pea6 at aro*nd age 80. d. )*rrent income is more e/*ally distrib*ted than permanent income. ANS: ) NAT: Analytic -S): Analytical !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

110. The life cycle effect characteri4es a lifetime income profile in which income a. tends to follow a seasonal pattern. b. rises as a wor6er gains mat*rity and e9perience. c. rises and falls in conC*nction with the b*siness cycle. d. falls d*ring the early years of mar6et activity and pea6s at retirement. ANS: 3 NAT: Analytic -S): Analytical !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

111. 3eca*se people can borrow when they are yo*ng+ the life cycle theory wo*ld s*ggest that oneHs standard of living depends on a. lifetime income rather than ann*al income. b. aggregate income rather than ann*al personal income. c. ann*al e9tended family income rather than ann*al personal income. d. income averaged across seasons rather than across years. ANS: A NAT: Analytic -S): Analytical !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

)hapter %0?"ncome "ne/*ality and ,overty

11%. An e9ample of a transitory change in income is the a. ann*al cost of living adC*stment to yo*r salary. b. increase in income that res*lts from a Cob promotion lin6ed to yo*r ed*cation. c. increase in income of )alifornia orange growers that res*lts from an orange&6illing frost in lorida. d. All of the above are correct. ANS: ) NAT: Analytic -S): Applicative !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

==

112. Saving and borrowing is indicative of a family that a. is most li6ely to be poor. b. has a diffic*lt time balancing its standard of living. c. adC*sts its standard of living to reflect transitory changes in income. d. is most li6ely millionaires. ANS: ) NAT: Analytic -S): Applicative !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

115. S*ppose that a family saves and borrows to b*ffer itself against changes in income. These actions relate to which problem in meas*ring ine/*alityI a. "n&6ind transfers. b. Negative income ta9. c. Transitory vers*s permanent income. d. $conomic mobility. ANS: ) NAT: Analytic -S): "nterpretive !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

118. S*ppose that yo*ng people often borrow and then repay the loans when they are older. These actions relate to which problem in meas*ring ine/*alityI a. "n&6ind transfers. b. $conomic life cycle. c. Negative income ta9. d. $conomic mobility. ANS: 3 NAT: Analytic -S): Analytical !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

11:. S*ppose that amily A borrows money when its car brea6s down and saves money when the wife receives a holiday bon*s from her employer. S*ppose that amily 3 borrows money to b*y elaborate birthday presents for the children and spends the h*sbandAs holiday bon*s on a vacation to lorida. >hich of the following is correctI a. 3oth amily A and amily 3As spending habits s*ggest that they base their p*rchasing decisions on transitory income. b. amily AAs spending habits s*ggest that it bases its p*rchasing decisions on transitory income rather than permanent income. amily 3As spending habits s*ggest that it bases its p*rchasing decisions on permanent income rather than transitory income. c. amily AAs spending habits s*ggest that it bases its p*rchasing decisions on permanent income rather than transitory income. amily 3As spending habits s*ggest that it bases its p*rchasing decisions on transitory income rather than permanent income. d. 3oth amily A and amily 3As spending habits s*ggest that they base their p*rchasing decisions on permanent income. ANS: ) NAT: Analytic -S): Analytical !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

100

)hapter %0?"ncome "ne/*ality and ,overty

11;. S*ppose that 0a6e and Abby each win @1+000 in a state lottery. 0a6e spends his winnings on a new television. Abby saves her winnings for a rainy day. >hich of the following is correctI a. 3oth 0a6e and AbbyAs behaviors s*ggest that they base their p*rchasing decisions on transitory income. b. 0a6eAs behavior s*ggests that he bases his p*rchasing decisions on transitory income rather than permanent income. AbbyAs behavior s*ggest that she bases her p*rchasing decisions on permanent income rather than transitory income. c. 0a6eAs behavior s*ggests that he bases his p*rchasing decisions on permanent income rather than transitory income. AbbyAs behavior s*ggests that she bases her p*rchasing decisions on transitory income rather than permanent income. d. 3oth 0a6e and AbbyAs behaviors s*ggest that they base their p*rchasing decisions on permanent income. ANS: 3 NAT: Analytic -S): Analytical !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic life cycle

11<. >hich of the following statements is not correctI a. The percentage of the pop*lation that s*ffers from long&term poverty is far smaller than the percentage of the pop*lation that s*ffers from short&term poverty beca*se there is a high level of economic mobility in the .nited States. b. ,ermanent income is a better meas*re of a familyHs ability to b*y the necessities of life than is transitory income. c. The economic life cycle theory e9plains why gifts of goods and services red*ce poverty for the very yo*ng and the very old. d. 3eca*se people can borrow and save to smooth o*t changes in income+ their standard of living in any one year depends more on lifetime income than on a partic*lar yearHs income. ANS: ) !" : 2 #$ : NAT: Analytic '(): $fficiency and e/*ity T(,: $conomic life cycle 7 $conomic mobility %0&1 -S): Analytical

11=. >hat percent of families are poor for eight or more yearsI a. -ore than %0 percent. b. 3etween 18 and %0 percent. c. Appro9imately 10 percent. d. 'ess than 2 percent. ANS: ! NAT: Analytic -S): Applicative !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic mobility

1%0. !ata for the .nited States s*ggests that abo*t how many millionaires inherited their fort*nesI a. (ne in seven. b. (ne in five. c. (ne in three. d. (ne in two. ANS: 3 NAT: Analytic -S): Applicative !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic mobility

1%1. "ncome mobility st*dies s*ggest that poverty a. cannot be alleviated by privately sponsored anti&poverty programs. b. cannot be alleviated by government sponsored anti&poverty programs. c. is a long&term problem for a relatively large n*mber of families. d. is not a long&term problem for most families. ANS: ! NAT: Analytic -S): Applicative !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic mobility

)hapter %0?"ncome "ne/*ality and ,overty

1%%. $conomic mobility in the .nited States is so great that fewer than a. 2 percent of families are poor for < or more years. b. 8 percent of families are poor for < or more years. c. < percent of families are poor for < or more years. d. 10 percent of families are poor for < or more years. ANS: A NAT: Analytic -S): Applicative !" : 1 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic mobility

101

1%2. $conomic mobility refers to the a. governmentHs attempt to distrib*te monetary assistance to areas most in need. b. ability of families to freely relocate to find good Cobs. c. movement of people among income classes. d. movement of reso*rces from one co*ntry to another. ANS: ) NAT: Analytic -S): !efinitional !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic mobility

1%5. "n the .nited States appro9imately <0 percent of millionaires did not inherit their wealth. This statement is an e9ample of a. transitory income. b. the effectiveness of government anti&poverty programs. c. economic mobility. d. permanent income. ANS: ) NAT: Analytic -S): Analytical !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic mobility

1%8. >hich of the following statements is correctI a. 'ess than three percent of families are categori4ed as poor for eight years or more. b. "n the .nited States+ the grandson of a millionaire is m*ch more li6ely to be rich than the grandson of an average&income person. c. The maCority of millionaires in the .nited States inherited their wealth. d. -ost wor6ers have abo*t the same income DadC*sted for inflationE when they are yo*ng as when they are middle&aged. ANS: A NAT: Analytic -S): Analytical !" : % #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic mobility

1%:. >hich of the following does not e9plain why data on income distrib*tion and the poverty rate give an incomplete pict*re of ine/*alityI a. in&6ind transfers b. economic life cycle c. transitory income d. All of the above contrib*te to an incomplete pict*re of ine/*ality. ANS: ! NAT: Analytic -S): Analytical !" : 2 #$ : '(): $fficiency and e/*ity %0&1 T(,: $conomic mobility

1%;. >hich of the following statements is correctI a. The .nited States has a more e/*al distrib*tion of income than other developed co*ntries s*ch as 0apan and 1ermany. b. The statement a rising tide lifts all boats ill*strates how economic growth red*ces the n*mber of people with income levels below the poverty line. c. The economic life cycle e9plains why people base spending decisions on transitory income. d. The libertarian political philosophy follows the ma9imin criterion.

10%
ANS: NAT: T(,: -S):

)hapter %0?"ncome "ne/*ality and ,overty

3 !" : 2 #$ : %0&1 7 %0&% 7 %0&2 Analytic '(): $fficiency and e/*ity "ncome ine/*ality 7 ,overty level 7 $conomic life cycle 7 'iberalism Analytical

1%<. >hen considering a personAs standard of living+ data on the income distrib*tion and the poverty rate may provide an incomplete pict*re beca*se the poor may a. receive in&6ind transfers. b. be lending in order to smooth their income over their life cycle. c. be saving in order to smooth their income d*e to a drop in transitory income. d. *nder&report their income. ANS: A !" : % #$ : NAT: Analytic '(): $fficiency and e/*ity T(,: "n&6ind transfers+ $conomic life cycle %0&1 -S): Applicative

ec 02%%Income Inequality and Poverty The political philo(ophy o) redi(tri+utin- income

&ULTIPLE C!"ICE 1. >hether or not policyma6ers sho*ld try to ma6e o*r society more egalitarian is largely a matter of a. economic efficiency. b. political philosophy. c. egalitarian principles. d. enhanced opport*nity. !" : % #$ : %0&% '(): The role of government T(,: "ncome redistrib*tion

ANS: 3 NAT: Analytic -S): "nterpretive %.

>hich political philosophy believes that the government sho*ld e/*ali4e the incomes of all members of societyI a. .tilitarianism. b. 'iberalism. c. 'ibertarianism. d. None of the above is correct. !" : % #$ : %0&% '(): The role of government T(,: "ncome redistrib*tion

ANS: ! NAT: Analytic -S): "nterpretive 2.

>hen the government ta9es income as part of a redistrib*tion program+ a. the poor pay higher ta9es. b. the rich always benefit more than the poor. c. the poor are enco*raged to wor6. d. incentives to earn income are diminished. !" : % #$ : %0&% '(): The role of government T(,: "ncome redistrib*tion

ANS: ! NAT: Analytic -S): "nterpretive 5.

>hen incentives to earn income are distorted by income redistrib*tion programs+ a. losses can e9ceed potential gains from greater e/*ality of income. b. total income in an economy can fall. c. total *tility in society can fall. d. All of the above are correct. !" : % #$ : '(): $fficiency and e/*ity %0&% T(,: "ncome redistrib*tion

ANS: ! NAT: Analytic -S): "nterpretive

)hapter %0?"ncome "ne/*ality and ,overty

8. >hich of the following will not occ*r when government policies are enacted to ma6e the distrib*tion of income more e/*itableI a. ,eople will alter their behaviors. b. "ncentives will be distorted. c. Total *tility will remain constant. d. The allocation of reso*rces will be less efficient . !" : % #$ : %0&% '(): The role of government T(,: "ncome redistrib*tion

102

ANS: ) NAT: Analytic -S): Analytical :.

As a res*lt of the trade&off between income e/*ality and incentives to wor6+ an optimal redistrib*tion policy a. can never be f*nded thro*gh ta9es on labor income. b. m*st always achieve a f*ll egalitarian society. c. only benefits the middle class. d. always falls short of a f*lly egalitarian society. !" : 2 #$ : '(): $fficiency and e/*ity %0&% T(,: "ncome redistrib*tion

ANS: ! NAT: Analytic -S): Analytical ;.

>hich gro*p wo*ld be the least *pset by wide variation in the income distrib*tionI a. .tilitarians. b. 'iberals. c. 'ibertarians. d. $ach gro*p wo*ld be e/*ally *pset. !" : 2 #$ : %0&% '(): The role of government T(,: "ncome redistrib*tion

ANS: ) NAT: Analytic -S): Analytical <.

>hich gro*p Dor gro*psE wo*ld be the most *pset by wide variation in the income distrib*tionI a. .tilitarians b. .tilitarians and liberals. c. 'ibertarians. d. 'iberals and 'ibertarians. !" : 2 #$ : %0&% '(): The role of government T(,: "ncome redistrib*tion

ANS: 3 NAT: Analytic -S): Analytical =.

>hich of the following programs wo*ld be opposed by philosopher 0ohn #awlsI a. A negative income ta9. b. The S*pplemental Sec*rity "ncome DSS"E program. c. A ta9 plan creating a perfectly egalatarian income distrib*tion. d. #awls wo*ld oppose all of the programs.

ANS: ) !" : 2 #$ : %0&% 7 %0&2 NAT: Analytic '(): The role of government T(,: "ncome redistrib*tion 7 'iberalism -S): Analytical 10. >hen designing p*blic policies+ which income gro*p wo*ld philosopher 0ohn #awls arg*e needs the most attentionI a. "ndivid*als located in the bottom fifth of the income distrib*tion. b. "ndivid*als located at the average income level.. c. "ndivid*als located in the top fifth of the income distrib*tion. d. "ndivid*als located in the top five percent of the income distrib*tion.

ANS: A !" : % #$ : %0&% 7 %0&2 NAT: Analytic '(): The role of government T(,: "ncome redistrib*tion 7 'iberalism -S): Analytical

105
11.

)hapter %0?"ncome "ne/*ality and ,overty

>hich of the following programs to alleviate poverty wo*ld be most favored by philosopher #obert No4ic6 and whyI a. A negative income ta9 beca*se it wo*ld ma9imi4e the minim*m income of members of society. b. An $arned "ncome Ta9 )redit D$"T)E beca*se a policy that rewards the wor6ing poor wo*ld be the most C*st. c. An in&6ind transfer program beca*se it wo*ld ma9imi4e the total *tility of all members of society. d. None of the programs wo*ld be favored beca*se each of them forcibly redistrib*tes income that was fairly+ if not e/*ally+ earned.

ANS: ! !" : 2 #$ : %0&% 7 %0&2 NAT: Analytic '(): The role of government T(,: "ncome redistrib*tion 7 'ibertarianism -S): 1%.

Analytical

>hich of the following programs to alleviate poverty wo*ld be most favored by philosopher #obert No4ic6I a. A negative income ta9. b. An $arned "ncome Ta9 )redit D$"T)E. c. An in&6ind transfer program. d. None of the programs wo*ld be favored.

ANS: ! !" : 2 #$ : %0&% 7 %0&2 NAT: Analytic '(): The role of government T(,: "ncome redistrib*tion 7 'ibertarianism -S):

Analytical

Scenario 20-1 S*ppose that a society is made *p of five families whose incomes are as follows: @1%0+000L @=0+000L @20+000L @20+000L and @1<+000. The federal government is considering two potential income ta9 plans: ,lan A is a negative income ta9 plan where the ta9es owed e/*al 1?2 of income min*s @%0+000. ,lan 3 is a two&tiered plan where the poverty line is @28+000L families earning over @28+000 pay 10G of their income in ta9es+ and families earning less than @28+000 pay no income ta9. 12. Re)er to cenario 20%', Ass*ming that *tility is directly proportional to the cash val*e of after&ta9 income+ which government policy wo*ld an advocate of *tilitarianism preferI a. ,lan A b. ,lan 3 c. either ,lan A or ,lan 3 d. neither ,lan A nor ,lan 3 beca*se any plan that forcibly redistrib*tes income is against the philosophy

ANS: A !" : 2 #$ : %0&% 7 %0&2 NAT: Analytic '(): The role of government T(,: "ncome redistrib*tion 7 .tilitarianism 15.

-S): Analytical

Re)er to cenario 20%'. Ass*ming that *tility is directly proportional to the cash val*e of after&ta9 income+ which government policy wo*ld an advocate of liberalism preferI a. ,lan A b. ,lan 3 c. either ,lan A or ,lan 3 d. neither ,lan A nor ,lan 3 beca*se any plan that forcibly redistrib*tes income is against the philosophy

ANS: A !" : 2 #$ : %0&% 7 %0&2 NAT: Analytic '(): The role of government T(,: "ncome redistrib*tion 7 'iberalism -S): Analytical 18. Re)er to cenario 20%'. Ass*ming that *tility is directly proportional to the cash val*e of after&ta9 income+ which government policy wo*ld an advocate of libertarianism preferI a. ,lan A b. ,lan 3 c. either ,lan A or ,lan 3 d. neither ,lan A nor ,lan 3 beca*se any plan that forcibly redistrib*tes income is against the philosophy

)hapter %0?"ncome "ne/*ality and ,overty

ANS: ! !" : 2 #$ : %0&% 7 %0&2 NAT: Analytic '(): The role of government T(,: "ncome redistrib*tion 7 'ibertarianism -S): 1:.

108

Analytical

#aising total *tility is the prime obCective of which political philosophyI a. .tilitarianism. b. 'iberalism. c. 'ibertarianism. d. None of the above is correct. !" : 1 #$ : '(): $fficiency and e/*ity %0&% T(,: .tilitarianism

ANS: A NAT: Analytic -S): "nterpretive 1;.

The government sho*ld choose policies to ma9imi4e the total *tility of society. This statement is most closely associated with which political philosophyI a. 'iberalism. b. .tilitarianism. c. 'ibertarianism. d. >elfarism. !" : 1 #$ : %0&% '(): The role of government T(,: .tilitarianism

ANS: 3 NAT: Analytic -S): !efinitional 1<.

.tilitarianism is a. a liberal religion that foc*ses on individ*al rights. b. a political philosophy that believes the government sho*ld choose policies deemed to be C*st by an impartial observer. c. a political philosophy that believes the government sho*ld not redistrib*te income. d. a political philosophy that believes the government sho*ld choose policies to ma9imi4e the total *tility of society. !" : 1 #$ : '(): $fficiency and e/*ity %0&% T(,: .tilitarianism

ANS: ! NAT: Analytic -S): !efinitional 1=.

According to a *tilitarian+ total social *tility will be ma9imi4ed when marginal dollars are distrib*ted to the people with the a. lowest marginal *tility of income. b. highest marginal *tility of income. c. highest total *tility from their income. d. most prod*ctive labor reso*rces. !" : 1 #$ : %0&% '(): The role of government T(,: .tilitarianism

ANS: 3 NAT: Analytic -S): !efinitional %0.

The fo*nders of *tilitarianism incl*de a. A. ). ,igo* and 0ohn -aynard Peynes. b. 0eremy 3entham and 0ohn St*art -ill. c. A*g*stin )o*rnot and 0ean 3. Say. d. A. Pondratieff and Thomas -alth*s. !" : 1 #$ : '(): $fficiency and e/*ity %0&% T(,: .tilitarianism

ANS: 3 NAT: Analytic -S): Applicative %1.

>hich of the following statements is characteristic of *tilitarianismI a. An e9tra dollar of income provides higher marginal *tility to a poor person than to a rich person. b. Social policies sho*ld be created behind a Jveil of ignorance.J c. Society sho*ld strive to ma9imi4e the *tility of its wealthiest member. d. $/*ality of opport*nity is more important than e/*ality of incomes.

10:

)hapter %0?"ncome "ne/*ality and ,overty

!" : % #$ : '(): $fficiency and e/*ity %0&% T(,: .tilitarianism

ANS: A NAT: Analytic -S): "nterpretive %%.

According to *tilitarians+ the *ltimate obCective of p*blic actions sho*ld be to a. enhance the income of the rich. b. ens*re an egalitarian distrib*tion of income. c. ma9imi4e the s*m of individ*al *tility. d. provide for the betterment of the poor. !" : % #$ : %0&% '(): The role of government T(,: .tilitarianism

ANS: ) NAT: Analytic -S): "nterpretive %2.

The concept of *tility is f*ndamental to *tilitarianism and describes the a. optimal distrib*tion of wealth in society. b. level of satisfaction derived from a personHs circ*mstances. c. method by which society chooses to allocate reso*rces. d. method whereby wealth is stored. !" : % #$ : %0&% '(): .tility and cons*mer choice T(,: .tilitarianism

ANS: 3 NAT: Analytic -S): "nterpretive %5.

The *tilitarian case for redistrib*ting income is based on the ass*mption of a. collective consens*s. b. a notion of fairness engendered by e/*ality. c. diminishing marginal *tility. d. rising marginal *tility.

ANS: ) !" : 1 #$ : %0&% NAT: Analytic '(): The role of government T(,: !iminishing marginal *tility 7 .tilitarianism %8.

-S): "nterpretive

The concept of diminishing marginal *tility is embedded in the *tilitarian rationale for a. tric6le&down effects. b. enhancing mar6et efficiency. c. redistrib*ting income. d. maintaining the stat*s /*o income distrib*tion.

ANS: ) !" : % #$ : %0&% NAT: Analytic '(): The role of government T(,: !iminishing marginal *tility 7 .tilitarianism %:.

-S): "nterpretive

!iminishing marginal *tility s*ggests that a. more is always preferred to less. b. the well&being of society is ma9imi4ed when the distrib*tion of income is e/*al. c. the poor are less efficient at spending money than the rich. d. the poor receive more satisfaction from the last dollar spent than the rich. %0&% -S): "nterpretive

ANS: ! !" : % #$ : NAT: Analytic '(): $fficiency and e/*ity T(,: !iminishing marginal *tility 7 .tilitarianism %;.

>hich of the following statements ill*strates diminishing marginal *tilityI a. An e9tra dollar of income to a poor person provides that person with more additional *tility than does an e9tra dollar to a rich person. b. An e9tra dollar of income to a poor person provides that person with less additional *tility than does an e9tra dollar to a rich person. c. An e9tra dollar of income to a poor person provides that person with the same additional *tility as does an e9tra dollar to a rich person. d. An e9tra dollar of income to a poor person provides that person with the same total *tility as does an e9tra dollar to a rich person.

)hapter %0?"ncome "ne/*ality and ,overty

ANS: A NAT: Analytic -S): !efinitional %<. !" : % #$ : '(): $fficiency and e/*ity %0&% T(,: !iminishing marginal *tility

10;

-s. Spring c*rrently earns @100+000 a year+ while her C*nior partner+ -r. all+ earns @88+000 a year. rom the perspective of a *tilitarian+ if both of their incomes are s*bCect to diminishing marginal *tility+ ta6ing a dollar from -s. Spring and giving it to -r. all will a. increase societyHs total *tility. b. lower -s. SpringHs marginal *tility of income. c. increase -r. allHs marginal *tility of income. d. lower societyAs total *tlity. %0&% -S): Analytical

ANS: A !" : % #$ : NAT: Analytic '(): $fficiency and e/*ity T(,: !iminishing marginal *tility 7 .tilitarianism %=.

JAn e9tra dollar of income gives more additional satisfaction to a poor person than to a rich person.J This is an important ass*mption of which political philosophyI a. .tilitarianism. b. 'iberalism. c. 'ibertarianism. d. #ep*blicanism. %0&% -S): "nterpretive

ANS: A !" : % #$ : NAT: Analytic '(): $fficiency and e/*ity T(,: .tilitarianism 7 !iminishing marginal *tility 20.

S*ppose a society consists of only two people: 0ohn and 0ane. A *tilitarian wo*ld say that the proper role of government in this society is to a. e/*ali4e the incomes of 0ohn and 0ane. b. e/*ali4e 0ohnAs *tility and 0aneAs *tility. c. e/*ali4e 0ohnAs marginal *tility and 0aneAs marginal *tility. d. ma9imi4e the s*m of 0ohnAs *tility and 0aneAs *tility. !" : % #$ : %0&% '(): The role of government T(,: .tility

ANS: ! NAT: Analytic -S): "nterpretive 21.

A society consists of three individ*als: Arth*r+ 3illie+ and )hris. "n terms of income and *tility+ Arth*r is c*rrently best&off+ 3illie ran6s in the middle+ and )hris is worst&off. >hich of the following statements is correctI a. .tilitarianism s*ggests that government policies sho*ld strive to ma9imi4e the s*m of all three individ*alsA *tility. b. 'iberalism s*ggests that government policies sho*ld strive to ma9imi4e the s*m of 3illieAs *tility and )hrisAs *tility. c. 'ibertarianism s*ggests that government policies sho*ld strive to ma9imi4e )hrisAs *tility. d. -obilism s*ggests that the government policies sho*ld strive to ma6e 3illie better off than Arth*r. !" : % #$ : %0&% '(): The role of government T(,: .tility

ANS: A NAT: Analytic -S): "nterpretive 2%.

The $nglish philosophers 0eremy 3entham and 0ohn St*art -ill fo*nded the school of tho*ght called a. liberalism. b. libertarianism. c. mobilism. d. *tilitarianism. !" : 1 #$ : %0&% '(): The st*dy of economics+ and definitions of economics -S): !efinitional

ANS: ! NAT: Analytic T(,: $conomists

10<
22.

)hapter %0?"ncome "ne/*ality and ,overty

>hich political philosophy believes in balancing the gains from greater e/*ality against the losses from distorted incentivesI a. .tilitarianism. b. 'iberalism. c. 'ibertarianism. d. Sec*larism. !" : % #$ : %0&% '(): The role of government T(,: .tilitarianism

ANS: A NAT: Analytic -S): "nterpretive 25.

"n the parable of the lea6y b*c6et+ a f*ndamental problem with government redistrib*tion programs is identified. As long as the government only has Jlea6y b*c6etsJ at its disposal+ a. the costs of welfare programs will e9ceed the benefits. b. it sho*ld not try to reach complete e/*ality in income. c. income e/*ality will be the best policy option. d. e/*ality of economic opport*nity will red*ce societyAs *tility. !" : 2 #$ : %0&% '(): The role of government T(,: .tilitarianism

ANS: 3 NAT: Analytic -S): Analytical 28.

S*ppose that income is s*bCect to constant marginal *tility. rom a *tilitarian perspective+ a. some income redistrib*tion from rich to poor wo*ld increase social welfare. b. some income redistrib*tion from poor to rich wo*ld increase social welfare. c. any income redistrib*tion wo*ld probably red*ce social welfare. d. any income redistrib*tion wo*ld probably increase social welfare. !" : 2 #$ : '(): $fficiency and e/*ity %0&% T(,: .tilitarianism

ANS: ) NAT: Analytic -S): Analytical 2:.

S*ppose that income is s*bCect to increasing marginal *tility. rom a *tilitarian perspective+ a. some income redistrib*tion from rich to poor wo*ld increase social welfare. b. some income redistrib*tion from poor to rich wo*ld increase social welfare. c. any income redistrib*tion wo*ld probably red*ce social welfare. d. any income redistrib*tion wo*ld probably increase social welfare. !" : 2 #$ : '(): $fficiency and e/*ity %0&% T(,: .tilitarianism

ANS: 3 NAT: Analytic -S): Analytical 2;.

'iberalism is the political philosophy espo*sed by a. #obert No4ic6. b. 0ohn St*art -ill. c. 0ohn #awls. d. 0eremy 3entham. !" : 1 #$ : %0&% '(): The role of government T(,: 'iberalism

ANS: ) NAT: Analytic -S): "nterpretive 2<.

The ma9imin criterion is attrib*ted to which political philosophyI a. .tilitarianism. b. 'iberalism. c. 'ibertarianism. d. #ep*bicanism. !" : 1 #$ : %0&% '(): The role of government T(,: 'iberalism

ANS: 3 NAT: Analytic -S): "nterpretive

)hapter %0?"ncome "ne/*ality and ,overty

2=. #aising the welfare of the worst&off person in society is an important goal of which political philosophyI a. .tilitarianism. b. 'iberalism. c. 'ibertarianism. d. Sec*larism. !" : 1 #$ : %0&% '(): The role of government T(,: 'iberalism

10=

ANS: 3 NAT: Analytic -S): "nterpretive 50.

The government sho*ld choose policies deemed to be C*st+ as eval*ated by an impartial observer behind a Qveil of ignorance.A This statement is most closely associated with which political philosophyI a. 'iberalism. b. .tilitarianism. c. 'ibertarianism. d. >elfarism. !" : 1 #$ : %0&% '(): The role of government T(,: 'iberalism

ANS: A NAT: Analytic -S): !efinitional 51.

S*ppose that 0amal is moving to a state where personal incomes are distrib*ted randomly. "f 0amal believes in liberalism+ he wo*ld prefer a. an income distrib*tion that is relatively e/*al. b. that everyone has the same wor6 opport*nities and mar6et&determined wage rates. c. that private property be transformed to government property to safeg*ard peopleAs incomes. d. less economic assistance to the poor beca*se it distorts the price system. !" : % #$ : %0&% '(): The role of government T(,: 'iberalism

ANS: A NAT: Analytic -S): Analytical 5%.

The philosopher 0ohn #awls arg*ed that a. people wo*ld choose a more e/*al distrib*tion of income if they had to determine an economic distrib*tion system before 6nowing their place in it. b. people wo*ld choose income ine/*ality to allow the ma9im*m *se of their individ*al talents. c. government has a role to ens*re income e/*ality to prevent social *nrest. d. people wo*ld choose income e/*ality beca*se it is morally right. !" : % #$ : %0&% '(): The role of government T(,: 'iberalism

ANS: A NAT: Analytic -S): Analytical 52.

'iberalism is fo*nded on a premise that behind a Jveil of ignorance+J a. C*stice cannot be agreed *pon. b. everyoneAs income sho*ld be e/*al. c. everyone wo*ld agree to JC*stJ r*les to reallocate income. d. society sho*ld ma9imi4e the s*m of individ*al *tilities. !" : % #$ : '(): $fficiency and e/*ity %0&% T(,: 'iberalism

ANS: ) NAT: Analytic -S): "nterpretive 55.

The maximin criterion for government policies is associated with a. the school of tho*ght called *tilitarianism. b. the school of tho*ght called liberalism. c. the school of tho*ght called libertarianism. d. the school of tho*ght called stoicism. !" : 1 #$ : %0&% '(): The role of government T(,: .tility

ANS: 3 NAT: Analytic -S): "nterpretive

110
58.

)hapter %0?"ncome "ne/*ality and ,overty

According to the doctrine of liberalism+ principles of C*stice are the res*lt of a. fair agreement and bargain. b. command&and&control policies. c. domination of the powerf*l by the wea6. d. wor6ers owning the factors of prod*ction. !" : % #$ : %0&% '(): The role of government T(,: 'iberalism

ANS: A NAT: Analytic -S): "nterpretive 5:.

The political philosophy that views the redistrib*tion of income as a form of social ins*rance is a. .tilitarianism. b. 'iberalism. c. 'ibertarianism. d. >elfarism. !" : % #$ : %0&% '(): The role of government T(,: 'iberalism

ANS: 3 NAT: Analytic -S): "nterpretive 5;.

The maximin criterion s*ggests that social policy sho*ld a. e9propriate the factors of prod*ction from the capitalist class. b. ens*re an e/*al distrib*tion of income. c. elevate the well&being of those at the bottom of the income distrib*tion. d. elevate the well&being of all wor6ers. !" : % #$ : %0&% '(): The role of government T(,: 'iberalism

ANS: ) NAT: Analytic -S): "nterpretive 5<.

'iberalism s*ggests that p*blic policies sho*ld aim to a. ma9imi4e the s*m of *tility of everyone in society. b. ma9imi4e the well&being of the average person in society. c. ma9imi4e the well&being of the worst&off person in society. d. minimi4e the difference between the *tility of the best&off person in the society and the *tility of the worst&off person in society. !" : % #$ : %0&% '(): The role of government T(,: .tility

ANS: ) NAT: Analytic -S): "nterpretive 5=.

A society consists of three individ*als: Arth*r+ 3illie+ and )hris. "n terms of income and *tility+ Arth*r is c*rrently best&off+ 3illie ran6s in the middle+ and )hris is worst&off. >hich of the following statements is correctI a. .tilitarianism s*ggests that government policies sho*ld strive to ma9imi4e 3illieAs *tility. b. 'iberalism s*ggests that government policies sho*ld strive to ma9imi4e )hrisAs *tility. c. 'ibertarianism s*ggests that government policies sho*ld strive to ma9imi4e Arth*rAs *tility. d. -obilism s*ggests that government policies sho*ld strive to ma6e )hris better off than 3illie. !" : % #$ : %0&% '(): The role of government T(,: .tility

ANS: 3 NAT: Analytic -S): "nterpretive 80.

The r*le for redistrib*tion proposed by 0ohn #awls in his boo6 A Theory of Justice is called the a. Joptimal ignoranceJ r*le. b. libertarian C*stice r*le. c. ma9imin criterion. d. egalitarian criterion. !" : % #$ : %0&% '(): The role of government T(,: 'iberalism

ANS: ) NAT: Analytic -S): "nterpretive

)hapter %0?"ncome "ne/*ality and ,overty

81. According to the ma9imin criterion+ income sho*ld be transferred from the rich to the poor as long as it a. raises the well&being of the least fort*nate. b. does not alter incentives to wor6 and save. c. promotes an e/*al distrib*tion of income. d. does not lower the welfare of the elderly. !" : % #$ : %0&% '(): The role of government T(,: 'iberalism

111

ANS: A NAT: Analytic -S): "nterpretive 8%.

"f society chose to ma9imi4e average *tility rather than minim*m *tility+ a. society wo*ld achieve perfect income e/*ality. b. society wo*ld achieve the ma9imin obCective. c. its C*stice wo*ld be more *tilitarian than #awlsian. d. its C*stice wo*ld be more #awlsian than *tilitarian. !" : 2 #$ : %0&% '(): The role of government T(,: 'iberalism

ANS: ) NAT: Analytic -S): Analytical 82.

>o*ld the ma9imin criterion achieve perfect income e/*alityI a. Kes. There wo*ld be no way to reallocate reso*rces to raise the *tility of the poor. b. Kes. The ma9imin criterion wo*ld eliminate poverty. c. No. "t is impossible for complete e/*ality to benefit the worst&off people in society. d. No. )omplete e/*ality wo*ld red*ce incentives to wor6+ which wo*ld red*ce total income+ which wo*ld red*ce the incomes of the worst&off people in society. !" : 2 #$ : '(): $fficiency and e/*ity %0&% T(,: 'iberalism

ANS: ! NAT: Analytic -S): Analytical 85.

J(nly individ*al members of society earn income+ not society itself.J This statement is most closely associated with the political philosophy of a a. *tilitarian. b. liberal. c. libertarian. d. None of the above is correct. !" : 1 #$ : %0&% '(): The role of government T(,: 'ibertarianism

ANS: ) NAT: Analytic -S): "nterpretive 88.

The government sho*ld p*nish crimes and enforce vol*ntary agreements b*t not redistrib*te income. This statement is most closely associated with which political philosophyI a. 'iberalism. b. .tilitarianism. c. 'ibertarianism. d. >elfarism. !" : 1 #$ : %0&% '(): The role of government T(,: 'ibertarianism

ANS: ) NAT: Analytic -S): !efinitional 8:.

$/*ality of opport*nities is more important than e/*ality of incomes. This statement wo*ld be most li6ely attrib*ted to which political philosophyI a. .tilitarianism. b. 'iberalism. c. 'ibertarianism. d. >elfarism. !" : 1 #$ : %0&% '(): The role of government T(,: 'ibertarianism

ANS: ) NAT: Analytic -S): "nterpretive

11%
8;.

)hapter %0?"ncome "ne/*ality and ,overty

#obert No4ic6 critici4es #awlsH concept of C*stice by *sing an e9ample of a. minim*m wage laws. b. the grade distrib*tion in an economics class. c. a lea6y b*c6et. d. the price of tea in )hina. !" : 1 #$ : %0&% '(): The role of government T(,: 'ibertarianism

ANS: 3 NAT: Analytic -S): "nterpretive 8<.

>hich political philosophy foc*ses on the process of determining the distrib*tion of income rather than on the outcomeI a. .tilitarianism. b. 'iberalism. c. 'ibertarianism. d. >elfarism. !" : % #$ : %0&% '(): The role of government T(,: 'ibertarianism

ANS: ) NAT: Analytic -S): "nterpretive 8=.

According to a libertarian+ if income were to be distrib*ted e/*ally+ a. prod*ctivity wo*ld increase. b. social *tility wo*ld increase. c. the marginal prod*ctivity of the poor wo*ld fall+ whereas the marginal prod*ctivity of the rich wo*ld rise. d. prod*ctivity wo*ld decrease. !" : % #$ : %0&% '(): The role of government T(,: 'ibertarianism

ANS: ! NAT: Analytic -S): Applicative :0.

'ibertarians believe that in considering economic fairness+ one sho*ld primarily consider the a. o*tcome of the system. b. process by which o*tcomes arise. c. ma9imin criterion. d. ma9imi4ing total social *tility. !" : % #$ : %0&% '(): The role of government T(,: 'ibertarianism

ANS: 3 NAT: Analytic -S): "nterpretive :1.

'ibertarianism identifies a redistrib*tion of income role for government when a. individ*al incomes vary widely. b. the income distrib*tion is altered by illegal means De.g. theftE. c. a social planner is needed to smooth o*t the transitory income stream. d. wor6ers lose their Cobs as a res*lt of str*ct*ral changes in the economy. !" : % #$ : %0&% '(): The role of government T(,: 'ibertarianism

ANS: 3 NAT: Analytic -S): "nterpretive :%.

'ibertarians believe that a. it is more important to eval*ate the process by which economic o*tcomes are prod*ced+ rather than the o*tcomes themselves. b. government sho*ld attempt to redistrib*te income from the rich to the poor when the gap between rich and poor is more than %0G. c. $fficiency of opport*nities is more important than efficiency of income levels. d. it is more important to eval*ate economic o*tcomes first and then the process that prod*ced them. !" : % #$ : %0&% '(): The role of government T(,: .tility

ANS: A NAT: Analytic -S): "nterpretive

)hapter %0?"ncome "ne/*ality and ,overty

:2. "n general+ which of the following wo*ld libertarians arg*e is more important than e/*al o*tcomesI a. $/*al opport*nities. b. $/*al incomes. c. ,roviding a social safety net. d. Ass*ring fair compensation for wor6ers. !" : % #$ : %0&% '(): The role of government T(,: 'ibertarianism

112

ANS: A NAT: Analytic -S): "nterpretive :5.

3ill earns more than !onna. A legislator proposes ta9ing 3ill to s*pplement !onnaHs income. A libertarian wo*ld view this proposal as a. a way to increase social C*stice. b. a way to enhance !onnaHs income in a socially responsible way. c. validation of the s*periority of a libertarian ma9imin criterion over #awlsian social C*stice. d. an inappropriate role for government+ since government cannot morally redistrib*te income that is not its own. !" : 2 #$ : '(): $fficiency and e/*ity %0&% T(,: 'ibertarianism

ANS: ! NAT: Analytic -S): Analytical

ec 00%%Income Inequality and Poverty Policie( to reduce poverty

&ULTIPLE C!"ICE 1. 3inding minim*m&wage laws a. are most effective at alleviating poverty when labor demand is highly elastic. b. force a mar6et imbalance between the s*pply and demand for labor. c. increase the efficiency of labor mar6ets. d. are typically associated with a rise in employment among the poor. !" : 1 #$ : '(): 'abor mar6ets %0&2 T(,: -inim*m wage

ANS: 3 NAT: Analytic -S): Applicative

115

)hapter %0?"ncome "ne/*ality and ,overty

Figure 20-3

%.

Re)er to Fi-ure 20%0. "f the government imposes a minim*m wage above >o+ it is li6ely to a. increase employment to a level above Oo. b. red*ce employment to a level below Oo. c. provide more income to the wor6ing poor than they collectively received before the minim*m wage was set. d. have no effect on employment. !" : % #$ : %0&2 '(): #eading and interpreting graphs T(,: -inim*m wage

ANS: 3 NAT: Analytic -S): Applicative 2.

Re)er to Fi-ure 20%0. An effective minim*m wage wo*ld be set at a level a. above >o+ and employment wo*ld rise above Oo. b. above >o+ and employment wo*ld fall below Oo. c. below >o+ and employment wo*ld rise above Oo. d. below >o+ and employment wo*ld fall below Oo. !" : % #$ : %0&2 '(): #eading and interpreting graphs T(,: -inim*m wage

ANS: 3 NAT: Analytic -S): Applicative 5.

-inim*m wage laws a. benefit all *ns6illed wor6ers. b. create *nemployment+ b*t if demand is relatively elastic+ the *nemployment effects will be minor. c. may help the nonpoor+ s*ch as teenagers from wealthy families. d. red*ce poverty by red*cing *nemployment. !" : % #$ : '(): $fficiency and e/*ity %0&2 T(,: -inim*m wage

ANS: ) NAT: Analytic -S): "nterpretive 8.

A binding minim*m wage a. affects employees b*t not employers. b. lowers the prod*ctivity of wor6ers. c. raises the cost of labor to firms. d. All of the above are correct. !" : % #$ : '(): 'abor mar6ets %0&2 T(,: -inim*m wage

ANS: ) NAT: Analytic -S): Applicative

)hapter %0?"ncome "ne/*ality and ,overty

:. )ritics of the minim*m wage arg*e that a. labor demand is inelastic so firms can adC*st prod*ction. b. too many older employees benefit at the e9pense of teenage wor6ers. c. many minim*m&wage earners are teenagers from middle&class families. d. All of the above are correct. !" : % #$ : '(): 'abor mar6ets %0&2 T(,: -inim*m wage

118

ANS: ) NAT: Analytic -S): "nterpretive ;.

$conomists who s*pport minim*m&wage legislation are li6ely to believe that the a. demand for *ns6illed labor is relatively inelastic. b. demand for *ns6illed labor is relatively elastic. c. s*pply of *ns6illed labor is relatively elastic. d. s*pply of *ns6illed labor is relatively inelastic. !" : 2 #$ : '(): 'abor mar6ets %0&2 T(,: -inim*m wage

ANS: A NAT: Analytic -S): Analytical <.

A common criticism of welfare programs is that they a. create self&reliant individ*als. b. enco*rage strong family val*es. c. enco*rage illegitimate births. d. have increasing benefits over time+ in real terms. !" : 1 #$ : '(): 'abor mar6ets %0&2 T(,: >elfare

ANS: ) NAT: Analytic -S): Applicative =.

Since the early 1=;0s+ welfare benefits have declined+ a. which is largely d*e to the s*ccess of the negative income ta9 program. b. which is largely d*e to the s*ccess of private charities. c. yet the percentage of children living with only one parent has increased. d. and the percentage of children living with only one parent has decreased. !" : 1 #$ : '(): $fficiency and e/*ity %0&2 T(,: >elfare

ANS: ) NAT: Analytic -S): "nterpretive 10.

A common criticism of government programs that are designed to assist the poor is that a. those who receive assistance rarely meet the criterion for eligibility. b. the maCority of those below the poverty line ref*se to accept government assistance. c. they create incentives for people to become Jneedy.J d. they typically acco*nt for a maCority of ann*al government e9pendit*res. !" : 1 #$ : %0&2 '(): The role of government T(,: >elfare

ANS: ) NAT: Analytic -S): Applicative 11.

.nemployment ins*rance benefits is a type of a. in&6ind transfer. b. negative income ta9 payment. c. property income. d. welfare payment. !" : 1 #$ : %0&2 '(): The role of government T(,: >elfare

ANS: ! NAT: Analytic -S): !efinitional 1%.

>hich of the following is an e9ample of a welfare programI a. Temporary Assistance for Needy amilies DTAN E. b. )apital 1ains Ta9 D)1TE. c. 'ife )ycle Transfers D')TE. d. North American ree Trade Agreement DNA TAE.

11:

)hapter %0?"ncome "ne/*ality and ,overty

!" : 1 #$ : %0&2 '(): The role of government T(,: >elfare

ANS: A NAT: Analytic -S): Applicative 12.

"n the Temporary Assistance for Needy amilies program+ most families a. m*st have both parents in the home to /*alify. b. are female head&of&ho*sehold families in which the father is absent. c. have ad*lt children with disabilities living at home. d. are ineligible to receive assistance from other s*pport programs. !" : % #$ : %0&2 '(): The role of government T(,: >elfare

ANS: 3 NAT: Analytic -S): Applicative 15.

Anti&poverty programs a. enco*rage saving among recipient gro*ps. b. impose a very low marginal ta9 rate on income. c. are only made available to those with no other so*rce of income. d. may disco*rage the poor from escaping poverty on their own. !" : % #$ : '(): $fficiency and e/*ity %0&2 T(,: >elfare

ANS: ! NAT: Analytic -S): Applicative 18.

)ritics of welfare reform arg*e that a. dr*g addiction has increased among the wor6ing poor. b. the emphasis on wor6 has forced many mothers into low&paying Cobs while not providing ade/*ate child care. c. homelessness has increased dramatically. d. the n*mber of people on welfare rolls increased after reform. !" : % #$ : '(): 'abor mar6ets %0&2 T(,: >elfare

ANS: 3 NAT: Analytic -S): Applicative 1:.

S*pporters of welfare reform arg*e that a. childhood literacy rates have increased. b. private charities have provided s*fficient child&care reso*rces for wor6ing mothers. c. employment has increased among the demographic gro*ps traditionally on welfare+ incl*ding single mothers. d. ta9 evasion declined among employers of former welfare recipients. !" : % #$ : %0&2 '(): The role of government T(,: >elfare

ANS: ) NAT: Analytic -S): Applicative 1;.

,roponents of welfare reform claim that programs that do not establish a time limit on recipient benefits harm children by a. forcing mothers to wor6 o*tside the home. b. enco*raging a psychological dependency on government programs. c. enco*raging child ab*se by absent fathers. d. creating dr*g addiction. !" : % #$ : %0&2 '(): The role of government T(,: >elfare

ANS: 3 NAT: Analytic -S): Applicative 1<.

>hich of the following statements is not correctI a. >elfare programs may enco*rage illegitimate births. b. The decline in welfare benefits since the 1=;0s has been associated with a decline in the percentage of children living with a single parent. c. >elfare programs may red*ce incentives for people to wor6. d. A negative income ta9 program *ses ta9 reven*es collected from high&income families to provide cash s*bsidies to low&income families.

)hapter %0?"ncome "ne/*ality and ,overty

ANS: 3 NAT: Analytic -S): Analytical 1=. !" : 2 #$ : %0&2 '(): The role of government T(,: >elfare

11;

>hich of the following statements is correctI a. A disadvantage of a minim*m&wage law is that it may benefit *ns6illed wor6ers who are not low& income wor6ers. b. A disadvantage of a negative income ta9 program is that a poor person who chooses not to wor6 many ho*rs wo*ld receive a cash benefit. c. A disadvantage of an $arned "ncome Ta9 )redit D$"T)E is that a person who is *nable to wor6 d*e to a disability does not benefit from the program. d. All of the above are correct. !" : 2 #$ : %0&2 '(): The role of government T(,: >elfare 7 -inim*m wage

ANS: ! NAT: Analytic -S): Analytical %0.

>hich of the following statements is correctI a. An advantage of a minim*m&wage law is that it may benefit *ns6illed wor6ers who are not low& income wor6ers. b. An advantage of a negative income ta9 program is that a poor person who chooses not to wor6 many ho*rs wo*ld receive a cash benefit. c. An advantage of an $arned "ncome Ta9 )redit D$"T)E is that a person who is *nable to wor6 d*e to a disability does not benefit from the program. d. ollowing the reform of welfare in 1==: there was a large decrease in the welfare rolls. !" : 2 #$ : '(): $fficiency and e/*ity %0&2 T(,: >elfare 7 -inim*m wage

ANS: ! NAT: Analytic -S): Analytical %1.

>hich of the following statements is not correctI a. An advantage of an in&6ind transfer is that it prevents an alcoholic from spending a cash benefit on alcohol. b. An advantage of the S*pplemental Sec*rity "ncome DSS"E program is that it benefits the sic6 and disabled. c. An advantage of a negative income ta9 program is that it enco*rages the poor to wor6 in order to be eligible. d. An advantage of a minim*m wage law is that it benefits some *ns6illed wor6ers.

ANS: ) !" : 2 #$ : %0&2 NAT: Analytic '(): The role of government T(,: >elfare 7 "n&6ind transfers 7 -inim*m wage %%.

-S): Analytical

A negative income ta9 system was designed to a. provide in&6ind benefits to the poor. b. provide a minim*m income to the poor. c. red*ce ta9es on the rich when their incomes s*rpass the ma9im*m income ta9 brac6et. d. s*bsidi4e food cons*mption in poor families. !" : 1 #$ : %0&2 '(): The role of government T(,: Negative income ta9

ANS: 3 NAT: Analytic -S): "nterpretive %2.

A ta9 provision that wor6s m*ch li6e a negative income ta9 is the a. $arned "ncome Ta9 )redit D$"T)E. b. Temporary Assistance for Needy amilies DTAN E. c. ded*ction for charitable contrib*tions. d. mortgage interest rate ded*ction. !" : 1 #$ : %0&2 '(): The role of government T(,: Negative income ta9

ANS: A NAT: Analytic -S): Applicative

11<
%5.

)hapter %0?"ncome "ne/*ality and ,overty

A negative income ta9 system wo*ld a. ma6e ta9es more regressive. b. sever the lin6 between ta9 policy and income distrib*tion. c. collect from high&income ho*seholds and give transfers to low&income ho*seholds. d. eliminate progressive ta9 rates. !" : % #$ : %0&2 '(): The role of government T(,: Negative income ta9

ANS: ) NAT: Analytic -S): Applicative %8.

The only /*alification to receive government assistance *nder a negative income ta9 is a. pre&school children. b. to be enrolled in Cob training. c. a wor6ing head&of&ho*sehold. d. a low income. !" : % #$ : %0&2 '(): The role of government T(,: Negative income ta9

ANS: ! NAT: Analytic -S): Applicative %:.

>hich of the following form*las is most representative of a negative income ta9 proposalI a. Ta9es (wed M D1?5 of "ncomeE @% b. Ta9es (wed M D1?% of "ncomeE 2?5 c. Ta9es (wed M D1?% of "ncomeE R @10+000 d. Ta9es (wed M D1?2 of "ncomeE & @10+000 !" : 2 #$ : %0&2 '(): The role of government T(,: Negative income ta9

ANS: ! NAT: Analytic -S): Analytical %;.

Ass*me that the government proposes a negative income ta9 that calc*lates the ta9es owed as follows: Ta9es (wed M D1?2 "ncomeE & 10+000. "f a family doesnHt earn any income+ how does the negative income ta9 affect themI a. They will receive an income s*bsidy of @1+000. b. They will receive an income s*bsidy of @2+000. c. They will receive an income s*bsidy of @10+000. d. They will not be affected at all+ since the negative income ta9 re/*ires a family to earn income. !" : 2 #$ : %0&2 '(): The role of government T(,: Negative income ta9

ANS: ) NAT: Analytic -S): Analytical %<.

Ass*me that the government proposes a negative income ta9 that calc*lates the ta9es owed as follows: Ta9es (wed M D1?2 "ncomeE & 10+000. A family that earns an income of @:0+000 will a. pay @10+000 in ta9es. b. receive an income s*bsidy of @2+000. c. receive an income s*bsidy of @10+000. d. neither pay ta9es nor receive an income s*bsidy. !" : 2 #$ : '(): $fficiency and e/*ity %0&2 T(,: Negative income ta9

ANS: A NAT: Analytic -S): Analytical %=.

Ass*me that the government proposes a negative income ta9 that calc*lates the ta9es owed as follows: Ta9es (wed M D1?2 "ncomeE & 10+000. A family that earns an income of @20+000 will a. neither pay ta9es nor receive an income s*bsidy. b. receive an income s*bsidy of @800. c. pay @1+000 in ta9es. d. pay @:00 in ta9es. !" : 2 #$ : %0&2 '(): The role of government T(,: Negative income ta9

ANS: A NAT: Analytic -S): Analytical

)hapter %0?"ncome "ne/*ality and ,overty

20. >hich of the following is not a characteristic of the $arned "ncome Ta9 )redit D$"T)EI a. "t does not disco*rage recipients from wor6ing. b. "t is less distortionary than other anti&poverty programs. c. "t helps the disabled who cannot wor6. d. "t applies only to the wor6ing poor. !" : 2 #$ : %0&2 '(): The role of government T(,: Negative income ta9

11=

ANS: ) NAT: Analytic -S): Analytical 21.

-edicaid and food stamps are a. available only to the elderly. b. forms of in&6ind assistance. c. forms of cash assistance. d. transfer payments. !" : 1 #$ : %0&2 '(): The role of government T(,: "n&6ind transfers

ANS: 3 NAT: Analytic -S): !efinitional 2%.

"n&6ind transfers are politically pop*lar beca*se a. they provide high /*ality food and shelter. b. they provide cash. c. allow resale of food stamps for cash+ if needed. d. the p*blic believes that the aid is not going to s*pport addictions. !" : % #$ : %0&2 '(): The role of government T(,: "n&6ind transfers

ANS: ! NAT: Analytic -S): "nterpretive 22.

>hich of the following is an advantage of an in&6ind transfer in comparison to a cash paymentI a. "n&6ind transfers cost less to administer than cash transfers. b. "n&6ind transfers restrict the *se of the benefitL th*s+ recipients receive necessities s*ch as food and health care. c. "n&6ind transfers are more efficient than cash transfers. d. "n&6ind transfers give the recipient more *tility than cash transfers. !" : % #$ : %0&2 '(): The role of government T(,: "n&6ind transfers

ANS: 3 NAT: Analytic -S): Analytical 25.

>hich of the following is most li6ely to e9plain why yo*ng children in developing co*ntries often wor6I a. Their parents want them to gain val*able wor6 e9perience. b. Their parents do not view ed*cation as important. c. Their families are poor. d. Their familiesA religio*s practices enco*rage child labor. !" : % #$ : '(): 'abor mar6ets %0&2 T(,: )hild labor

ANS: ) NAT: Analytic -S): Applicative 28.

>hich of the following statements is not correctI a. >hen most Americans pict*re child labor+ they thin6 of yo*ng children wor6ing in factories. "n fact+ many yo*ng children in poor co*ntries wor6 on family farms. b. -any yo*ng children wor6 in poor co*ntries rather than attend school beca*se ed*cation is not val*ed in those co*ntries. c. An increase in income for families in poor co*ntries is often associated with an increase in the n*mber of children attending school. d. "n the past+ most policies aimed at deterring child labor foc*sed on ed*cating the parents abo*t why their children sho*ld not wor6. !" : % #$ : '(): 'abor mar6ets %0&2 T(,: )hild labor

ANS: 3 NAT: Analytic -S): Applicative

1%0
2:.

)hapter %0?"ncome "ne/*ality and ,overty

>hich of the following statements abo*t the minim*m wage is correctI a. An increase in the minim*m wage enhances the well&being of all *ns6illed wor6ers. b. An increase in the minim*m wage has no effect on the well&being of middle&class families. c. Advocates of the minim*m wage arg*e that the demand for labor is relatively inelastic. d. )ritics of the minim*m wage arg*e that it is an *ndesirable way of helping the poor beca*se it is costly to the government. !" : % #$ : %0&2 '(): The role of government T(,: -inim*m wage

ANS: ) NAT: Analytic -S): "nterpretive 2;.

or which of the following programs can a person /*alify solely by having a low incomeI a. both Temporary Assistance for Needy amilies DTAN E and S*pplemental Sec*rity "ncome DSS"E b. Temporary Assistance for Needy amilies DTAN E b*t not S*pplemental Sec*rity "ncome DSS"E c. S*pplemental Sec*rity "ncome DSS"E b*t not Temporary Assistance for Needy amilies DTAN E d. neither Temporary Assistance for Needy amilies DTAN E nor S*pplemental Sec*rity "ncome DSS"E !" : % #$ : %0&2 '(): The role of government T(,: >elfare

ANS: ! NAT: Analytic -S): !efinitional 2<.

The ..S. welfare system was revised by a 1==: law that a. consolidated all of the previo*s assistance programs into a single program. b. limited the amo*nt of time that people co*ld receive assistance. c. said it was no longer necessary for poor people to demonstrate an additional need+ s*ch as small children or a disability+ to /*alify for assistance. d. t*rned all federally&r*n welfare programs over to the states. !" : % #$ : %0&2 '(): The role of government T(,: >elfare

ANS: 3 NAT: Analytic -S): !efinitional 2=.

,oor families are eligible for financial assistance+ witho*t having to demonstrate any additional need+ a. *nder the c*rrent welfare system and *nder a negative income ta9. b. *nder the c*rrent welfare system b*t not *nder a negative income ta9. c. *nder a negative income ta9 b*t not *nder the c*rrent welfare system. d. *nder neither the c*rrent welfare system nor *nder a negative income ta9.

ANS: ) !" : % #$ : %0&2 NAT: Analytic '(): The role of government T(,: Negative income ta9 7 >elfare -S): !efinitional 50. #elative to direct cash payments+ in&6ind transfers have the advantage of being a. more politically pop*lar. b. more efficient. c. more respectf*l of the poor. d. of a higher dollar val*e than cash payments. !" : % #$ : %0&2 '(): The role of government T(,: "n&6ind transfers

ANS: A NAT: Analytic -S): "nterpretive 51.

An e9ample of an in&6ind transfer to the poor is a. the negative income ta9. b. the $arned "ncome Ta9 )redit D$"T)E. c. -edicaid. d. Temporary Assistance for Needy amilies DTAN E. !" : % #$ : %0&2 '(): The role of government T(,: "n&6ind transfers

ANS: ) NAT: Analytic -S): "nterpretive

)hapter %0?"ncome "ne/*ality and ,overty

5%. $ric F. $dmonds+ an economist who has st*died child labor iss*es+ asserts that a. international trade has led to more children wor6ing in agric*lt*re in Fietnam. b. c*lt*re+ not poverty+ leads families to p*t their children to wor6. c. policies to c*rb child labor have the effect of liberating millions of children from dismal lives wor6ing in factories. d. policies to c*rb child labor have the effect of p*nishing the poorest for being poor. !" : % #$ : %0&2 '(): The role of government T(,: )hild labor

1%1

ANS: ! NAT: Analytic -S): "nterpretive 52.

-any !emocrats who campaigned in the %00: elections s*pported raising the ..S. minim*m wage. Critics of raising the minim*m wage arg*e that minim*m&wage laws are a. too e9pensive for local governments to f*nd. b. too e9pensive for local governments to administer. c. imprecise in their ability to help the wor6ing poor. d. easy for b*sinesses to pay. !" : % #$ : '(): $fficiency and e/*ity %0&2 T(,: -inim*m wage

ANS: ) NAT: Analytic -S): "nterpretive 55.

-any !emocrats who campaigned in the %00: elections s*pported raising the ..S. minim*m wage. S*pporters of raising the minim*m wage arg*e that minim*m&wage laws are a. a ta9&free way to help the wor6ing poorL after all+ b*siness bear the b*rden of paying higher wages+ not the government. b. better that the $arned "ncome Ta9 )redit D$"T)E in targeting the wor6ing poorL after all+ the $"T) may benefit teenagers from middle&class families who wor6 s*mmer Cobs at the minim*m wage. c. better than in&6ind transfers s*ch as food stamps in providing food rather than *nhealthy items s*ch as dr*gs or alcohol. d. a way to increase employment of those li6ely to ma6e the minim*m wage. !" : % #$ : '(): $fficiency and e/*ity %0&2 T(,: -inim*m wage

ANS: A NAT: Analytic -S): "nterpretive 58.

>hich of the following is not an e9ample of a welfare programI a. S*pplemental Sec*rity "ncome DSS"E b. Temporary Assistance for Needy amilies DTAN E c. food stamps d. minim*m wage laws !" : % #$ : '(): $fficiency and e/*ity %0&2 T(,: >elfare

ANS: ! NAT: Analytic -S): Applicative 5:.

>hich of the following statements is not correctI a. An advantage of the $arned "ncome Ta9 )redit D$"T)E is that it targets the wor6ing poor better than the minim*m wage beca*se it does not benefit teenagers from middle&class families who wor6 s*mmer Cobs at the minim*m wage. b. A disadvantage of in&6ind transfer programs s*ch as food stamps is that they force recipients to p*rchase from a restricted set of items which may not incl*de things that the poor need the most s*ch as diapers or cleaning s*pplies. c. A disadvantage of minim*m wage laws is that they are e9pensive for state and local governments to f*nd. d. $ffective minim*m wage laws create a s*rpl*s of labor.

ANS: ) !" : 2 #$ : %0&2 NAT: Analytic '(): $fficiency and e/*ity T(,: -inim*m wage+ >elfare+ Negative income ta9 -S):

Analytical

1%%
5;.

)hapter %0?"ncome "ne/*ality and ,overty

>hich of the following statements is correctI a. An disadvantage of S*pplemental Sec*rity "ncome DSS"E is that it does not enco*rage families to brea6 *p in order to /*alify for assistance. b. A disadvantage of in&6ind transfer programs s*ch as food stamps is that they force recipients to p*rchase from a restricted set of items which may not incl*de things that the poor need the most s*ch as diapers or cleaning s*pplies. c. A disadvantage of minim*m wage laws is that they are e9pensive for state and local governments to f*nd. d. An advantage of a negative income ta9 is that it enco*rages the poor to wor6 in order to receive government assistance. 3 !" : 2 #$ : %0&2 Analytic '(): $fficiency and e/*ity -inim*m wage+ >elfare+ Negative income ta9+ >or6 incentives Analytical

ANS: NAT: T(,: -S): 5<.

>hich of the following statements is correct regarding the international phenomenon of child laborI a. The highest percentage of child laborers wor6 in factories. b. ,olicies that restrict the opport*nities for children to wor6 are li6ely to p*nish the poorest families. c. The most significant reason why children wor6 is that their parents do not *nderstand the benefits of childhood ed*cation. d. >hen a family e9periences an increase in income+ the children are more li6ely to wor6 longer ho*rs+ especially if they are wor6ing in agric*lt*re. !" : % #$ : '(): $fficiency and e/*ity %0&2 T(,: )hild labor

ANS: 3 NAT: Analytic -S): Applicative 5=.

"nitial policy efforts to c*rb child labor foc*sed on a. ed*cating parents. b. ed*cating children. c. banning child&made prod*cts. d. ta9ing employers that hire children. !" : 1 #$ : '(): 'abor mar6ets %0&2 T(,: )hild labor

ANS: A NAT: Analytic -S): Analytical 80.

-ost children wor6 in which sector of the economyI a. agric*lt*re b. man*fact*ring c. information technology d. service sector Cobs+ s*ch as -c!onalds !" : 1 #$ : '(): 'abor mar6ets %0&2 T(,: )hild labor

ANS: A NAT: Analytic -S): Analytical 81.

$ric F. $dmonds says which of the following e9plains most of the drop in child labor rates in FietnamI a. the availability of good schools b. the availability of Cobs c. rising family income d. internet access !" : % #$ : '(): 'abor mar6ets %0&2 T(,: )hild labor

ANS: ) NAT: Analytic -S): Analytical 8%.

>hich of the following statements is not correctI a. The biggest e9planation for international child labor is poverty. b. )ritics of the welfare system arg*e that it brea6s *p families. c. (ne of the problems with meas*ring income ine/*ality is val*ing in&6ind transfers. d. .tilitarians believe that the government sho*ld p*nish crimes b*t sho*ld not redistrib*te income.

)hapter %0?"ncome "ne/*ality and ,overty

ANS: ! !" : 2 #$ : %0&1 7 %0&% 7 %0&2 NAT: Analytic '(): $fficiency and e/*ity T(,: "ncome ine/*ality 7 .tilitarianism 7 >elfare 7 )hild labor -S): Analytical 82. >hich of the following statements is correctI a. ollowers of the liberalism political philosophy believe that society sho*ld ma9imi4e the total of individ*al *tilities. b. The poverty line is adC*sted for regional differences in the costs of raising children. c. (ne advantage to the $arned "ncome Ta9 )redit D$"T)E is that it benefits the wor6ing poor. d. >hen family incomes rise in poor co*ntries+ yo*ng children are more li6ely to be ta6en o*t of school to wor6 on family farms.

1%2

ANS: ) !" : 2 #$ : %0&1 7 %0&% 7 %0&2 NAT: Analytic '(): $fficiency and e/*ity T(,: ,overty 7 'iberalism 7 Negative income ta9 7 )hild labor -S): Analytical 85. >hich of the following statements is not correctI a. Two 6ey elements of welfare reform are wor6 re/*irements and limiting the time that recipients can receive benefits. b. The $arned "ncome Ta9 )redit D$"T)E is very similar to a negative income ta9. c. -inim*m wage laws will li6ely increase *nemployment. d. The elderly are more li6ely to be poor than single mothers. ! !" : 2 #$ : %0&1 7 %0&% 7 %0&2 Analytic '(): $fficiency and e/*ity "ncome ine/*ality 7 ,overty 7 -inim*m wage 7 Negative income ta9 Analytical

ANS: NAT: T(,: -S):