# Chapter 20 Income Inequality and Poverty

Test A
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A person’s earnings depends on a. how well the economy is doing. b. whether or not the economy is experiencing inflation. c. the supply and demand for that person’s labor. d. how much profit that person’s employer is able to make. ANSWE ! c. the supply and demand for that person’s labor. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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/abor earnings make up what part of total income in the 0.S. economy1 a. all of it b. three2fourths c. one2half d. one2fourth ANSWE ! b. three2fourths "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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)f income were e4ually distributed across all families5 a. all families would more likely be rich than poor. b. the relati6e share of income would decline as the number of families are increased. c. the relati6e share of income would increase as the number of families are increased. d. 78 percent of the families would recei6e exactly 78 percent of the income. ANSWE ! d. 78 percent of the families would recei6e exactly 78 percent of the income. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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+ased on data from 1::;5 what percent of all income in the 0nited States did the top fifth of all families recei6e1 a. 9 percent b. 3. percent c. 97 percent d. 7; percent ANSWE ! c. 97 percent "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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E6idence suggests that the women’s mo6ement has a. increased income ine4uality across households. b. decreased income ine4uality across households. c. had no effect on the distribution of income across households. d. decreased the importance of traditional measures of income ine4uality. ANSWE ! a. increased income ine4uality across households. "#\$E! % &E#1! ( SE(")*N! 1 *+,E(")-E! 1 AN'*%! #

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...  (hapter .>?)ncome )ne4uality and \$o6erty
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)n the 0nited States the po6erty rate is a measure of the a. number of people whose annual income is less than A1;5>>>. b. number of people whose annual household income is less than A3:5>>>. c. percentage of people whose income falls below an identified income standard. d. percentage of go6ernment expenditures spent on programs to relie6e po6erty. ANSWE ! c. percentage of people whose income falls below an identified income standard. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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*6er the past few years5 growth in a6erage income has a. eliminated po6erty. b. failed to decrease the po6erty rate. c. decreased the po6erty rate. d. increased the po6erty rate in some years5 and decreased it in other years. ANSWE ! b. failed to decrease the po6erty rate. "#\$E! % &E#1! ( SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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%easures of po6erty that fail to account for the 6alue of in2kind transfers a. o6erstate the actual po6erty rate. b. understate the actual po6erty rate. c. ha6e little effect on the 6alidity of reported po6erty rates. d. are generally more reliable in accounting for annual 6ariation in actual po6erty rates. ANSWE ! a. o6erstate the actual po6erty rate. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 9 AN'*%! #
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"he life cycle effect characteriBes a life2time income profile in which income a. falls during the early years of market acti6ity and peaks at retirement. b. rises as a worker gains maturity and experience. c. rises and falls in conCunction with the business cycle. d. tends to follow a seasonal pattern. ANSWE ! b. rises as a worker gains maturity and experience. "#\$E! % &E#1! ( SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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Sa6ing and borrowing beha6ior is indicati6e of a family a. that is most likely to be poor. b. that has a difficult time balancing its standard of li6ing. c. that is most likely to be on the upper end of the income distribution. d. adCusting its standard of li6ing to reflect transitory changes in income. ANSWE ! d. adCusting its standard of li6ing to reflect transitory changes in income. "#\$E! % &E#1! ( SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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A family’s ability to buy goods and ser6ices depends largely on its a. permanent income. b. in2kind transfers. c. lifetime income. d. transitory income. ANSWE ! a. permanent income. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! . AN'*%! #
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Economic mobility refers to the a. mo6ement of people among income classes. b. mo6ement of resources from one industry to another. c. ability of families to freely relocate to find good Cobs. d. go6ernment’s attempt to distribute monetary assistance to areas most in need. ANSWE ! a. mo6ement of people among income classes. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #

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(hapter .>?)ncome )ne4uality and \$o6erty  ..3
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Whether or not policymakers should try to make our society more egalitarian is largely a matter of a. egalitarian principles. b. economic efficiency. c. political philosophy. d. enhanced opportunity. ANSWE ! c. political philosophy. "#\$E! % &E#1! ( SE(")*N! . *+,E(")-E! 3 AN'*%! #
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According to utilitarians5 the ultimate obCecti6e of pri6ate and public actions is to a. enhance the income of the rich. b. pro6ide for the betterment of the poor. c. maximiBe the sum of indi6idual utility. d. ensure an egalitarian distribution of income. ANSWE ! c. maximiBe the sum of indi6idual utility. "#\$E! % &E#1! ( SE(")*N! . *+,E(")-E! 3 AN'*%! #
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"he utilitarian case for redistributing income is based on the assumption of a. rising marginal utility. b. collecti6e consensus. c. a notion of fairness engendered by e4uality. d. diminishing marginal utility. ANSWE ! d. diminishing marginal utility. "#\$E! % &E#1! ' SE(")*N! . *+,E(")-E! 3 AN'*%! #
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When the go6ernment taxes income as part of a redistribution program a. the poor pay higher taxes. b. incenti6es to earn income are diminished. c. the rich always benefit more than the poor. d. incenti6es for the poor to work are enhanced. ANSWE ! b. incenti6es to earn income are diminished. "#\$E! % &E#1! ( SE(")*N! . *+,E(")-E! 9 AN'*%! #
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)n the parable of the leaky bucket5 a fundamental problem with go6ernment redistribution programs is identified. As long as the go6ernment only has Dleaky bucketsE at its disposal a. e4uality of economic opportunity is an unattainable goal. b. affirmati6e action programs are doomed to failure. c. it should not try to reach complete e4uality in income. d. full egalitarian policies will always dominate competing policy options. ANSWE ! c. it should not try to reach complete e4uality in income. "#\$E! % &E#1! ( SE(")*N! . *+,E(")-E! 9 AN'*%! #
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/iberalism is founded on a premise that behind a D6eil of ignoranceE a. no one would be considered in an Doriginal position.E b. Custice is a matter of political philosophy. c. Custice can ne6er be agreed upon. d. e6eryone would agree to DCustE rules to reallocate income. ANSWE ! d. e6eryone would agree to DCustE rules to reallocate income. "#\$E! % &E#1! ( SE(")*N! . *+,E(")-E! 9 AN'*%! #

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"he liberalism rule called the maximin criterion suggests that the focus of social policy would be to a. ele6ate the well2being of those at the bottom of income distribution. b. ele6ate the well2being of all workers. c. ensure an egalitarian distribution of income. d. expropriate the factors of production from the capitalist class. ANSWE ! a. ele6ate the well2being of those at the bottom of the income distribution. "#\$E! % &E#1! ' SE(")*N! . *+,E(")-E! 3 AN'*%! #
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A libertarian is likely to argue that a. society is responsible for ensuring an e4ual distribution of income. b. outcomes always dominate processes. c. go6ernment has no role in the economy. d. only indi6idual members of society can earn income. ANSWE ! d. only indi6idual members of society can earn income. "#\$E! % &E#1! ' SE(")*N! . *+,E(")-E! 3 AN'*%! #
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%inimum wage laws a. increase the efficiency of labor markets. b. force a market imbalance between the supply and demand for labor. c. are typically associated with a rise in employment among the poor. d. are most effecti6e at alle6iating po6erty when labor demand is highly elastic. ANSWE ! b. force a market imbalance between the supply and demand for labor. "#\$E! % &E#1! ' SE(")*N! 3 *+,E(")-E! 9 AN'*%! #
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E6idence suggests that a. the longer a family is on welfare5 the harder it is to get off welfare. b. legislation designed to limit the time a family can be on welfare will ne6er be passed. c. the best way to deter immigrants is to make legal aliens ineligible for many welfare benefits. d. welfare dependency is embraced by o6er ;>F of new welfare recipients. ANSWE ! a. the longer a family is on welfare5 the harder it is to get off welfare. "#\$E! % &E#1! ( SE(")*N! 3 *+,E(")-E! 9 AN'*%! #
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\$roponents of welfare reform claim that programs for the poor which do not establish a time limit on recipient benefits harm children by a. forcing mothers to work outside the home. b. encouraging child abuse by absent fathers. c. encouraging a psychological dependency on go6ernment programs. d. all of the abo6e. ANSWE ! c. encouraging a psychological dependency on go6ernment programs. "#\$E! % &E#1! ( SE(")*N! 3 *+,E(")-E! 9 AN'*%! #
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A negati6e income tax system would a. eliminate tax progressi6ity. b. make taxes more regressi6e. c. se6er the link between tax policy and income distribution. d. collect from high2income households and gi6e transfers to low2income households. ANSWE ! d. collect from high2income households and gi6e transfers to low2income households. "#\$E! % &E#1! ' SE(")*N! 3 *+,E(")-E! 9 AN'*%! #

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(hapter .>?)ncome )ne4uality and \$o6erty  ..8
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Assume that the go6ernment proposes a negati6e income tax that calculates taxes owed by the formula5 "AGES *WE' H I1?3 × )N(*%EJ K 1>5>>>. A family that earns an income of A@>5>>> will a. pay A1>5>>> in taxes. b. recei6e a subsidy of A35>>>. c. recei6e an income subsidy of A1>5>>>. d. neither pay taxes nor recei6e an income subsidy. ANSWE ! a. pay A1>5>>> in taxes. "#\$E! % &E#1! E SE(")*N! 3 *+,E(")-E! 9 )NS" 0(")*N! . AN'*%! N

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ANSWE ! c. the supply and demand for that person’s labor. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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ANSWE ! b. three2fourths "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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ANSWE ! d. 78 percent of the families would recei6e exactly 78 percent of the income. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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ANSWE ! c. 97 percent "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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ANSWE ! a. increased income ine4uality across households. "#\$E! % &E#1! ( SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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ANSWE ! c. percentage of people whose income falls below an identified income standard. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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ANSWE ! b. failed to decrease the po6erty rate. "#\$E! % &E#1! ( SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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ANSWE ! a. o6erstate the actual po6erty rate. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 9 AN'*%! #
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ANSWE ! b. rises as a worker gains maturity and experience "#\$E! % &E#1! ( SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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ANSWE ! d. adCusting its standard of li6ing to reflect transitory changes in income. "#\$E! % &E#1! ( SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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ANSWE ! a. permanent income. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! . AN'*%! #
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ANSWE ! a. mo6ement of people among income classes. "#\$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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ANSWE ! c. political philosophy. "#\$E! % &E#1! ( SE(")*N! . *+,E(")-E! 3 AN'*%! #
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ANSWE ! c. maximiBe the sum of indi6idual utility. "#\$E! % &E#1! ( SE(")*N! . *+,E(")-E! 3 AN'*%! #
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ANSWE ! d. diminishing marginal utility.

"#\$E! % &E#1! ' SE(")*N! . *+,E(")-E! 3 AN'*%! #
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ANSWE ! b. incenti6es to earn income are diminished. "#\$E! % &E#1! ( SE(")*N! . *+,E(")-E! 9 AN'*%! #
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ANSWE ! c. it should not try to reach complete e4uality in income. "#\$E! % &E#1! ( SE(")*N! . *+,E(")-E! 9 AN'*%! #
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ANSWE ! d. e6eryone would agree to LCustL rules to reallocate income. "#\$E! % &E#1! ( SE(")*N! . *+,E(")-E! 9 AN'*%! #
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ANSWE ! a. ele6ate the well2being of those at the bottom of the income distribution. "#\$E! % &E#1! ' SE(")*N! . *+,E(")-E! 3 AN'*%! #
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ANSWE ! d. only indi6idual members of society can earn income. "#\$E! % &E#1! ' SE(")*N! . *+,E(")-E! 3 AN'*%! #
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ANSWE ! b. force a market imbalance between the supply and demand for labor. "#\$E! % &E#1! ' SE(")*N! 3 *+,E(")-E! 9 AN'*%! #
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ANSWE ! a. the longer a family is on welfare5 the harder it is to get off welfare. "#\$E! % &E#1! ( SE(")*N! 3 *+,E(")-E! 9 AN'*%! #
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ANSWE ! c. encouraging a psychological dependency on go6ernment programs. "#\$E! % &E#1! ( SE(")*N! 3 *+,E(")-E! 9 AN'*%! #
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ANSWE ! d. collect from high2income households and gi6e transfers to low2income households. "#\$E! % &E#1! ' SE(")*N! 3 *+,E(")-E! 9 AN'*%! #
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ANSWE ! a. pay A1>5>>> in taxes. "#\$E! % &E#1! E SE(")*N! 3 *+,E(")-E! 9 )NS" 0(")*N! . AN'*%! N