62. Data indicate that the large increase in government spending on income transfers that started with the
War on Poverty during the latter half of the 1960s has resulted in
a.
a substantial reduction in the poverty rate.
b.
a more equal distribution of income.
c.
fewer single-parent families because a married couple receives benefits twice as large.
d.
little change in the official poverty rate.
63. Poor people, who receive income assistance from the government, often do not work because
a.
they face very high implicit marginal tax rates.
b.
they are usually not physically able to work.
c.
they have no desire for additional money.
d.
the government forces them to stay at home and take care of their children.
64. Income supplements large enough to significantly increase the economic status of poor people will
a.
encourage behavior that increases the risk of poverty.
b.
create high implicit marginal tax rates that reduce the incentive of transfer recipients to
earn.
c.
provide low-income recipients with a strong incentive to work and increase their earnings
so they will not be dependent on income transfers.
d.
do both a and b.
65. Assume that Ava is a single parent who is in poverty. She receives food stamps and Medicaid. For
every $100 that she earns, Ava loses $20 of her food stamp benefits and $15 in her Medicaid benefits.
Ava’s implicit marginal tax rate from these two programs is
a.
20 percent.
b.
30 percent.
c.
35 percent.
d.
45 percent.
66. Assume that DeShawn is a single parent who is in poverty. He receives food stamps and Medicaid. For
every $100 that he earns, DeShawn loses $35 of his food stamp benefits and $20 in his Medicaid
benefits. Also, DeShawn’s income is taxed at a rate of 10 percent. Then, Peter’s effective marginal tax
rate is
a.
45 percent.
b.
55 percent.
c.
65 percent.
d.
70 percent.
67. This year, Emily earned $2,000 more than last year. As a result, she received $500 less in government
transfers. Therefore, Emily’s implicit marginal tax rate is
a.
15 percent.
b.
25 percent.
c.
40 percent.
d.
75 percent.
68. This year, Tyrone earned a total of $9,000. As a result, he received $9,000 less in government
transfers. Therefore, his implicit marginal tax rate is
a.
zero.
b.
25 percent.
c.
50 percent.
d.
100 percent.
69. This year, Abigail earned $15,000 and she paid 15 percent in income and payroll taxes. She qualified
for Medicaid and food stamps. For every $100 that she earns, Abigail loses $35 in Medicaid benefits
and $15 in food stamps. Abigail faces an effective marginal tax rate of
a.
15 percent.
b.
35 percent.
c.
50 percent.
d.
65 percent.
70. If a family earned $10,000 and, as a consequence, sustained a reduction of $4,000 in government
benefits, the family’s implicit marginal tax rate would be
a.
10 percent.
b.
40 percent.
c.
60 percent.
d.
75 percent.
71. If a family earned an additional $6,000 and, as a consequence, sustained a reduction of $3,600 in
government benefits, the implicit marginal tax rate for this family would be
a.
zero.
b.
45 percent.
c.
60 percent.
d.
75 percent.
72. Economic analysis indicates that
a.
unorganized groups of taxpayers and consumers will be better able to secure redistribution
through the political process than well-organized interest groups.
b.
rent-seeking activities are beneficial to a nation’s prosperity because they alter public
policy.
c.
most income transfers in the United States are directed toward the poor.
d.
market adjustments and competition for transfers will erode much of the gain of transfer
recipients.
73. Redistribution through the public sector tends to lower economic prosperity because
a.
it weakens the link between productive activity and the reward derived from it.
b.
it encourages resources to flow into wasteful rent-seeking activities.
c.
the higher tax rates required to finance redistribution result in resources being devoted
toward tax avoidance activities.
d.
all of the above are true.
74. Which of the following is true concerning the distribution of income?
a.
Various measures of income inequality can be used to objectively determine the fairness
of an income distribution.
b.
When the political process is democratic, income transfer programs will redistribute
income from the rich to the poor.
c.
The fairness of an income distribution is a normative concept; it cannot be determined
objectively by economic criteria.
d.
Income inequality is the fairest method to allocate income.
75. Which of the following programs is most clearly advantageous to those with lower levels of income?
a.
farm subsidy programs
b.
the Social Security retirement program
c.
the Earned Income Tax Credit
d.
credit subsidies provided by the Import-Export bank to business firms that sell goods
abroad
76. The Earned Income Tax Credit
a.
tends to increase income inequality.
b.
is a program that provides additional income to workers with above-average incomes.
c.
tends to reduce income inequality.
d.
is both a and b.
77. Which of the following is true of the tax and transfer programs of the United States?
a.
Tax-transfer programs persistently redistribute income from the rich to the poor.
b.
Social Security, the largest transfer program, redirects income toward the elderly, a group
with above-average levels of both income and wealth.
c.
The bulk of agriculture subsidies go to large farmers with above-average incomes.
d.
Taxes generally take a larger share of the income of the poor than is true for those with
higher incomes.
e.
Both b and c are true.
78. Which of the following is true?
a.
The size of the economic pie to be divided among a country’s residents is fixed.
b.
Government tax and transfer programs have exerted a strong equalizing impact on the
distribution of income in the United States.
c.
The method of allocating income is relevant to the issue of fairness as well as the pattern
of income distribution.
d.
The optimal distribution of income can be determined by objective economic criteria.
79. Which of the following is true?
a.
The best distribution of income can be determined objectively.
b.
The transfer of income from one group to another is costly; it will generally reduce total
output.
c.
Positive economics can determine the variation in incomes that would be best for an
economy.
d.
The fairness of an income distribution is determined by its pattern (the measured degree of
income inequality).
e.
All of the above are true.
Figure 15-1
80. As shown in Figure 15-1, the perfect equality line is drawn between points
a.
A and B.
b.
B and D.
c.
A and C along the straight line.
d.
A and C along the curve.
81. As shown in Figure 15-1, 60 percent of families earned a cumulative share of about ____ of income.
a.
5 percent
b.
15 percent
c.
30 percent
d.
50 percent
82. As shown in Figure 15-1, 80 percent of families earned a cumulative share of about ____ of income.
a.
5 percent
b.
15 percent
c.
30 percent
d.
50 percent
83. As shown in Figure 15-1, the distance between points B and D means that 60 percent of families earn
less of total income than required for perfect equality.
a.
30 percent
b.
60 percent
c.
90 percent
d.
insufficient information to answer question.
84. As shown in Figure 15-1, the degree of unequal income distribution is measured by the area between
the
a.
Lorenz curve and the horizontal axis.
b.
Lorenz curve and the vertical axis.
c.
Perfect equality line and the origin.
d.
Perfect equality line and the Lorenz curve.
Figure 15-2
85. According to the Lorenz curve shown in Figure 15-2, what percentage of total income is earned by the
richest 20 percent of families?
a.
20 percent.
b.
40 percent.
c.
60 percent.
d.
80 percent.
86. If this economy’s distribution of income becomes more equal, then the Lorenz curve shown in Figure
15-2 will
a.
move closer to the 45 line.
b.
become more bowed outward.
c.
lie above the 45 line.
d.
shift down and to the right.
Figure 15-3
87. As shown in Figure 15-3, the perfect equality line is drawn between points
a.
W and Y along the curve.
b.
X and Z.
c.
W and Y along the straight line.
d.
W and X.
88. As shown in Figure 15-3, 20 percent of families earned a cumulative share of about ____ percent of
income.
a.
5
b.
10
c.
30
d.
50
89. As shown in Figure 15-3, 40 percent of families earned a cumulative share of about ____ percent of
income.
a.
5
b.
15
c.
30
d.
50
Figure 15-4
90. Figure 15-4 shows the Lorenz Curve for three countries, I, II, and III. Which of the following
statements is true?
a.
Country I has the most unequal income distribution.
b.
Country II has the most unequal income distribution.
c.
Country I has the most equal income distribution.
d.
Country III has the most equal income distribution.
e.
Country II has a more equal income distribution than Country I.
91. Figure 15-4 shows the Lorenz Curve for three countries, I, II, and III. Of the three countries shown,
a.
country III has the most unequal income distribution.
b.
country II has the most unequal income distribution.
c.
country I has the most unequal income distribution.
d.
country III has the most equal income distribution.
e.
country II has a more equal income distribution than Country I.
92. In a market economy, differences in incomes will
a.
reflect the relative scarcity of resources.
b.
provide individuals with an incentive to supply resources that are valued by others.
c.
determine the income distribution among market participants.
d.
do all of the above.
93. When there is only a weak link between work effort and reward
a.
individuals will undertake fewer projects that create income.
b.
taxing the rich and distributing the money to the poor becomes the best way to increase the
size of the economic pie.
c.
corporations will profit more.
d.
individuals have a strong incentive to undertake projects that generate income.
94. In the United States the degree of individual income mobility (that is, the degree to which people move
from higher to lower or lower to higher income groupings) is
a.
rigid in both directions.
b.
flexible in both directions.
c.
flexible upward but rigid downward since high income perpetuates itself from generation
to generation.
d.
flexible downward but rigid upward since most low-income people never rise significantly
above the poverty level.
95. The poverty threshold income level is
a.
adjusted annually for increases in real per capita income.
b.
adjusted annually for changes in prices.
c.
invariant to differences in the size and composition of families.
d.
the highest income level that would leave one in the bottom quintile of income recipients.
96. Evaluate this sentence, “The best way to get rid of poverty is to increase government expenditures on
welfare programs.”
a.
This sentence is inherently true. By providing the poor with more money they will no
longer remain in poverty.
b.
This sentence is true. Everyone would be better off if we increased government transfer
programs.
c.
This sentence is false. Increasing transfer benefits like welfare will lower the opportunity
cost of making decisions that can lead to poverty
d.
This sentence is false. Increasing government expenditures will only be harmful to those
in poverty.
97. Assume that Jamal is a single parent who is in poverty. He receives food stamps and Medicaid. For
every $100 that he earns, Jamal loses $35 in food stamps and $20 in Medicaid benefits. Also, Jamal’s
income is taxed at a rate of 10%. Then, Jamal’s total tax rate is
a.
45 percent
b.
55 percent
c.
65 percent
d.
70 percent
98. This year Terrance earned $3,000 more than last year. As a result, he received $2,500 less in
government transfers. Therefore, Terrance’s implicit marginal tax rate is about
a.
16 percent
b.
25 percent
c.
66 percent
d.
83 percent
99. Annual income data would be a better index of economic inequality if
a.
all households filed tax returns revealing their real income.
b.
households were more different with regard to age and size characteristics.
c.
all households were more similar with regard to size, age, education, and other major
factors that are linked to income.
d.
mathematicians could grasp the complexities of the calculations.
100. The Samaritan’s dilemma describes the problem that exists when transfer programs, designed to help
the poor, encourage choices that can promote or perpetuate
a.
poverty.
b.
healthier lifestyles.
c.
reduced birth rates.
d.
increased life expectancy.
101. Which one of the following groups has a below-average incidence of poverty?
a.
divorced or separated persons
b.
African Americans and other minorities
c.
families headed by a female
d.
persons between the ages of 35 and 54
102. A valid argument against redistributing income to achieve complete equality is that
a.
income equality would destroy the social cohesiveness that exists among different income
groupings.
b.
this would eliminate the monetary incentives to work and produce.
c.
the cost of obtaining the equality would be so deflationary as to promote economic
instability.
d.
income equality would imply class segregation based on factors such as sex or race since
income would be constant.
103. In 2010, the poorest 20 percent of families in the United States population earned approximately ____
percent of the before-tax total income. (Fill in the blank.)
a.
1
b.
4
c.
9
d.
12
104. When determining whether an income places a family or individual in poverty, the official poverty rate
excludes
a.
money income derived from sources other than labor.
b.
money income received from transfer programs.
c.
noncash benefits derived from programs supplying recipients with food, housing, and
medical benefits.
d.
noncash benefits that are provided the non-elderly, but it counts these benefits when they
are supplied to the elderly.
ESSAY
105. Suppose you had the choice of attending two universities. University A pays all of its professors the
same wage and awards the same raises. University B pays each professor according to market wages
and productivity. Which university would you rather attend and why?
106. Why don’t we divide the economic pie evenly so that each person receives the same income?
107. Some people inherit money and wealth that they did nothing to earn. Why don’t we tax inheritance at
100 percent?
108. Andy observes that the income distribution between the richest and poorest people in the population
has remained fixed for decades. He concludes that the rich stay rich and the poor stay poor. Is this a
valid conclusion, or has Andy missed something?
109. Why does the government provide benefits in-kind? Why don’t we just give money to low-income
people?
ANS:
110. The mythical country of Quitar has just established a policy to give very generous in-kind benefits to
the nation’s poor, currently defined as those earning less than $10,000 a year. Several years later, the
poverty rate has not fallen. Why not?
111. Why not designate the poorest 10 percent of the population as the official measure of poverty?
112. Income inequality exists in the United States. Is this necessarily a bad thing? Explain how our
assessment of income inequality depends crucially on the source of that inequality.