Income Inequality and Poverty 5021
131. In the United States, a typical worker‘s income peaks around age
a. 70.
b. 60.
c. 50.
d. 40.
132. People have their highest saving rates when they are
a. retired.
b. middle-aged.
c. married with young children.
d. young and single.
133. The regular pattern of income variation over a person‘s life is called the
a. earned income cycle.
b. substitution effect.
c. life cycle.
d. pattern of change.
5022 Income Inequality and Poverty
134. A family‘s ability to buy goods and services depends largely on the family’s
a. economic mobility.
b. place in the economic life cycle.
c. transitory income.
d. permanent income.
135. Susan won $2,000 at the blackjack tables on her birthday. Her winnings are an example of
a. permanent income.
b. life-cycle income.
c. transitory income.
d. an in–kind transfer.
Income Inequality and Poverty 5023
136. Which of the following statements is correct?
a. The distribution of annual income accurately reflects the distribution of living standards.
b. Permanent incomes are more equally distributed than annual incomes.
c. Transitory changes in income generally have a significant impact on a family’s standard of
living.
d. Annual income is more equally distributed than permanent income.
137. Which of the following is correct?
a. Incomes tend to be high for young workers.
b. Incomes tend to rise sharply at retirement.
c. Incomes tend to peak at around age 50.
d. Current income is more equally distributed than permanent income.
5024 Income Inequality and Poverty
138. The life cycle effect characterizes a lifetime income profile in which income
a. tends to follow a seasonal pattern.
b. rises as a worker gains maturity and experience.
c. rises and falls in conjunction with the business cycle.
d. falls during the early years of market activity and peaks at retirement.
139. Because people can borrow when they are young, the life cycle theory would suggest that one‘s
standard of living depends on
a. lifetime income rather than annual income.
b. aggregate income rather than annual personal income.
c. annual extended-family income rather than annual personal income.
d. income averaged across seasons rather than across years.
Income Inequality and Poverty 5025
140. An example of a transitory change in income is the
a. annual cost of living adjustment to your salary.
b. increase in income that results from a job promotion linked to your education.
c. increase in income of California orange growers that results from an orange-killing frost in
Florida.
d. All of the above are correct.
141. Saving and borrowing is indicative of a family that
a. is most likely to be poor.
b. has a difficult time balancing its standard of living.
c. does not adjust its standard of living to reflect transitory changes in income.
d. is most likely millionaires.
5026 Income Inequality and Poverty
142. Suppose that a family saves and borrows to buffer itself against changes in income. These
actions relate to which problem in measuring inequality?
a. in-kind transfers
b. negative income tax
c. transitory versus permanent income
d. economic mobility
143. Suppose that young people often borrow and then repay the loans when they are older. These
actions relate to which problem in measuring inequality?
a. in-kind transfers
b. the economic life cycle
c. a negative income tax
d. economic mobility
Income Inequality and Poverty 5027
144. Suppose that Family A borrows money when its car breaks down and saves money when the
wife receives a holiday bonus from her employer. Suppose that Family B borrows money to buy
elaborate birthday presents for the children and spends the husband’s holiday bonus on a vacation
to Florida. Which of the following is correct?
a. Both Family A’s and Family B’s spending habits suggest that they base their purchasing
decisions on transitory income.
b. Family A’s spending habits suggest that it bases its purchasing decisions on transitory income
rather than permanent income. Family B’s spending habits suggest that it bases its purchasing
decisions on permanent income rather than transitory income.
c. Family A’s spending habits suggest that it bases its purchasing decisions on permanent
income rather than transitory income. Family B’s spending habits suggest that it bases its
purchasing decisions on transitory income rather than permanent income.
d. Both Family A’s and Family B’s spending habits suggest that they base their purchasing
decisions on permanent income.
5028 Income Inequality and Poverty
145. Suppose that Angelo and Sonia each win $500 in a charity raffle. Angelo spends his winnings on
a new ipad. Sonia saves her winnings. Which of the following is correct?
a. Both Angelo’s and Sonia’s behavior suggest that they base their purchasing decisions on
transitory income.
b. Angelo’s behavior suggests that he bases his purchasing decisions on transitory income rather
than permanent income. Sonia’s behavior suggest that she bases her purchasing decisions on
permanent income rather than transitory income.
c. Angelo’s behavior suggests that he bases his purchasing decisions on permanent income
rather than transitory income. Sonia’s behavior suggests that she bases her purchasing
decisions on transitory income rather than permanent income.
d. Both Angelo’s and Sonia’s behavior suggest that they base their purchasing decisions on
permanent income.
146. Which of the following statements is not correct?
a. The percentage of the population that suffers from long-term poverty is far smaller than the
percentage of the population that suffers from short-term poverty because there is a high level
of economic mobility in the United States.
b. Permanent income is a better measure of a family’s ability to buy the necessities of life than is
transitory income.
c. The economic life cycle theory explains why gifts of goods and services reduce poverty for
the very young and the very old.
d. Because people can borrow and save to smooth out changes in income, their standard of living
in any one year depends more on lifetime income than on a particular year’s income.
Income Inequality and Poverty 5029
147. The typical economic life cycle illustrates how people tend to
a. borrow more when they are younger and save more when they are middle-aged.
b. earn their peak incomes immediately prior to the typical retirement age of 65.
c. adjust their consumption based on changes in their transitory income.
d. All of the above are correct.
148. The Callaway family owns a small bait and tackle shop in a resort town in Wisconsin. An
economic recession reduces the number of tourists for one summer, which reduces the family’s
income for that year. For the Callaway family, their
a. transitory income for the year of the recession likely exceeds their permanent income.
b. permanent income likely exceeds their transitory income for the year of the recession.
c. permanent income will be more affected by the recession than their transitory income.
d. Both a and c are correct.
5030 Income Inequality and Poverty
149. The Hicks family owns a blueberry farm in Maine. The Ward family owns a blueberry farm in
Massachusetts. A drought in Massachusetts destroys half of the Ward family’s harvest for one
year. For the Ward family, their
a. transitory income for the year of the drought likely exceeds their permanent income.
b. permanent income likely exceeds their transitory income for the year of the drought.
c. transitory income likely will be affected but the permanent income of the Hicks family will
increase.
d. permanent income likely will be affected but the permanent income of the Hicks family will
not be affected.
150. The Smith family owns an apple orchard in Illinois. The Jones family owns an apple orchard in
Wisconsin. A late frost destroys half of the Smith family’s harvest for one year. For the Jones
family, their
a. transitory income for the year of the frost likely exceeds their permanent income.
b. permanent income likely exceeds their transitory income for the year of the frost.
c. permanent income will be more affected by the frost than their transitory income.
d. Both a and c are correct.
Income Inequality and Poverty 5031
151. For a typical worker, her income will be lower when she is younger, peak around age 50, and
decrease drastically when she retires. This pattern of changes in income for a typical worker is
called
a. the life cycle.
b. permanent income.
c. transitory income.
d. in-kind transfers.
152. A family’s ability to buy goods and services depends largely on its
a. permanent income, which is its normal, or average, income.
b. permanent income, which is the lowest annual income the family has received over a 10–year
period.
c. transitory income, which is the measure of income used by the government to analyze the
distribution of income and the poverty rate.
d. transitory income, which is its money income plus any in–kind transfers it receives.
5032 Income Inequality and Poverty
153. A typical worker’s normal or average income is called
a. the life cycle.
b. permanent income.
c. transitory income.
d. in-kind transfers.
154. Pietro is 40 years old and is laid off from his job at the paper plant and borrows from his savings
for 8 months until he finds a new job. Pietro’s
a. transitory income likely exceeds his permanent income for that year.
b. borrowing is representative of a normal economic life cycle.
c. permanent income is largely unaffected by this one time change to his income.
d. economic mobility during this year is highly unusual, as US workers tend to stay in a particular
income class.
Income Inequality and Poverty 5033
155. Miguel is a 20 year old college student who works part-time and earns an annual income of
$12,000. To smooth out his life cycle changes in income, Miguel can
a. save his earnings to use when he is middle-aged.
b. lend money to a friend to purchase a new car.
c. borrow money to pay for college, which he will later repay when his income rises.
d. attempt to pay for college from his current earnings.
156. The study by economists Cox and Alm found that the 2006 pre-tax income of the richest fifth of
U.S. households is
a. 5 times the pre–tax income of the poorest fifth.
b. 10 times the pre-tax income of the poorest fifth.
c. 15 times the pre-tax income of the poorest fifth.
d. 20 times the pre-tax income of the poorest fifth.
5034 Income Inequality and Poverty
157. The study by economists Cox and Alm found that the 2006 after-tax income of the richest fifth
of U.S. households is
a. equal to the after-tax income of the poorest fifth.
b. 7 times the after-tax income of the poorest fifth.
c. 14 times the after-tax income of the poorest fifth.
d. 21 times the after-tax income of the poorest fifth.
158. The study by economists Cox and Alm found
a. inequality in consumption is much smaller than inequality in annual income.
b. inequality in consumption is slightly smaller than inequality in annual income.
c. inequality in consumption is slightly larger than inequality in annual income.
d. inequality in consumption is much larger than inequality in annual income.
Income Inequality and Poverty 5035
159. The study by economists Cox and Alm found
a. the gap between rich and poor shrinks greatly if using after–tax income compared with pre-tax
income.
b. the gap between rich and poor shrinks slightly if using after-tax income compared with pre-tax
income.
c. the gap between rich and poor widens slightly if using after-tax income compared with pre-tax
income.
d. the gap between rich and poor widens greatly if using after–tax income compared with pre-tax
income.
160. Which of the following is not a finding of Cox and Alm regarding the gap between rich and
poor?
a. The gap shrinks if taxes are taken into account.
b. The gap shrinks if consumption, rather than income, is compared.
c. The gap shrinks if the number of people in the household is taken into account.
d. The gap shrinks if the state of residence is taken into account.
5036 Income Inequality and Poverty
161. Economists who study economic mobility have found that, if a father earns 20 percent above his
generation’s average income, his son will most likely earn
a. an income equal to his generation’s average income.
b. 8 percent above his generation’s average income.
c. 5 percent below his generation‘s average income.
d. 3 percent above his generation’s average income.
162. What percentage of millionaires in the United States are self-made?
a. about 20 percent
b. about 40 percent
c. about 60 percent
d. about 80 percent
Income Inequality and Poverty 5037
163. Economic mobility in the United States is
a. uncommon. Over 50 percent of poor families remain poor for 8 or more years.
b. uncommon. Over 75 percent of poor families remain poor for 8 or more years.
c. common. Fewer than 3 percent of poor families remain poor for 8 or more years.
d. common. Fewer than 1 percent of poor families remain poor for 8 or more years.
164. Economists who study economic mobility have found that the income of a grandfather and his
grandson‘s income are
a. not closely related.
b. negatively related.
c. directly related.
d. equal.
5038 Income Inequality and Poverty
165. What percent of families are poor for eight or more years?
a. more than 20 percent
b. between 15 and 20 percent
c. approximately 10 percent
d. less than 3 percent
166. Data for the United States suggests that about how many millionaires inherited their fortunes?
a. one in seven
b. one in five
c. one in three
d. one in two
167. Income mobility studies suggest 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 number of families.
d. is not a long-term problem for most families.
Income Inequality and Poverty 5039
168. Economic mobility in the United States is so great that fewer than
a. 3 percent of families are poor for 8 or more years.
b. 5 percent of families are poor for 8 or more years.
c. 8 percent of families are poor for 8 or more years.
d. 10 percent of families are poor for 8 or more years.
169. Economic mobility refers to the
a. government’s attempt to distribute monetary assistance to areas most in need.
b. ability of families to freely relocate to find good jobs.
c. movement of people among income classes.
d. movement of resources from one country to another.
5040 Income Inequality and Poverty
170. In the United States approximately 80 percent of millionaires did not inherit their wealth. This
illustrates the
a. amount of transitory income in the United States.
b. effectiveness of government anti-poverty programs in the United States.
c. great economic mobility in the United States.
d. level of permanent income in the United States.
171. Which of the following statements is correct?
a. Less than three percent of families are categorized as poor for eight years or more.
b. In the United States, the grandson of a millionaire is much more likely to be rich than the
grandson of an average-income person.
c. The majority of millionaires in the United States inherited their wealth.
d. Most workers have about the same income (adjusted for inflation) when they are young as
when they are middle-aged.