Economics Chapter 28—Income Inequality and Poverty
MULTIPLE CHOICE
1. In 2010, high-income families (the top 20 percent) in the United States earned approximately ____
percent of the total before-tax income.
a.
34
b.
48
c.
62
d.
79
2. Imagine two cities, Hometown and Visitorsville, where the rich, middle, and poor income recipients in
one city have annual incomes identical to their counterparts’ incomes in the other city. In Hometown,
the poorest families one year almost always end up as the richest families the next year and become
middle-income families the year after that. In Visitorsville, however, the poor remain poor and the rich
remain rich. Which of the following is true about the two cities?
a.
Annual data on the distribution of income will indicate that the degree of income
inequality in the two cities is identical.
b.
The degree of lifetime income inequality in the two cities is identical.
c.
The income mobility of people in the two cities is identical.
d.
The distribution of annual income is more unequal in Visitorsville.
3. Compared to low-income families, a larger proportion of high-income families
a.
is headed by a person with a college degree.
b.
has both a husband and a wife who work full time.
c.
is headed by a person between the ages of 35 and 64.
d.
is all of the above.
4. Which of the following is true?
a.
There is a fixed size of economic pie available for the government to allocate among
individuals.
b.
In a market economy, the link between productivity and income provides individuals with
an incentive to provide resources that are highly valued by others.
c.
Taxes and transfers do not affect the amount of income that is created.
d.
How income is distributed exerts little impact on the total amount of income generated.
5. When a person who receives welfare benefits earns income, those benefits are reduced as earned
income rises. This is referred to as
a.
an implicit marginal tax.
b.
the opportunity cost of income.
c.
the work-leisure trade-off.
d.
reverse discrimination.
6. Data on the distribution of income among individuals and families in the United States indicate that
a.
the power of labor unions and corporations is the major determinant of income inequality.
b.
the rich stay rich and the poor stay poor from one generation to another.
c.
much of the inequality in annual income emanates from differences in education, age,
hours worked, and family size.
d.
the difference in annual income emanating from ownership of capital assets is the major
source of economic inequality.
7. If complete equality of income were legislated, which of the following would economics predict?
a.
People would become richer.
b.
Society would gain utility from the extra goods produced.
c.
Individuals would willingly work longer hours and thus produce more.
d.
The incentive to produce and perform efficiently would be virtually eliminated.
8. Which of the following would cause the poverty threshold income level for a given family to increase
by 20 percent from one year to another?
a.
a 20 percent increase in the family’s income
b.
a 20 percent decrease in the family’s income
c.
a 20 percent increase in the general level of prices
d.
a 20 percent increase in real national income
9. Which of the following best explains why so many persons with incomes below the poverty threshold
income level work very little or not at all?
a.
They confront high implicit marginal tax rates.
b.
They do not enjoy income as much as other people.
c.
There are no jobs for low-skill workers.
d.
They often face very low explicit marginal tax rates.
10. (I) Positive economics cannot determine how much income inequality should be present in a country.
(II) Critics of government action to reduce income inequality argue that modifying the market
process of income determination may create perverse incentives and hurt wealth creation.
a.
Both I and II are true.
b.
Both I and II are false.
c.
I is true; II is false.
d.
I is false; II is true.
11. If complete equality of income were legislated, which of the following would economics predict?
a.
People would become richer.
b.
Society would gain utility from the extra goods produced.
c.
Individuals would willingly work longer hours and thus produce more.
d.
The incentive to produce and perform efficiently would be virtually eliminated.
12. In a market economy,
a.
there is a fixed economic pie to be divided among individuals.
b.
differences in incomes provide individuals with an incentive to supply resources that are
highly valued by others.
c.
a central distributing agency carves up the economic pie and allocates slices to individuals.
d.
both a and b above are true.
13. In a market economy, individuals have a strong incentive to develop their skills and provide others
with resources, goods, and services that they value because these activities generally
a.
improve the overall efficiency of the economy.
b.
increase aggregate output.
c.
lead to a higher personal income.
d.
provide additional tax revenue for the government.
14. Income is created when
a.
individuals supply others with productive resources that they value.
b.
the government levies taxes on some and transfers the revenues to others.
c.
the general level of prices increases.
d.
shares of stock are sold from their current owner to another party.
15. Which of the following is true?
a.
The close link between personal income and provision of productive resources to others
provides individuals with a strong incentive to develop skills.
b.
Income can be taxed away from some and transferred to others without altering the
incentive to engage in productive activities.
c.
Holding technology constant, the size of the economic pie available for distribution among
economic participants is fixed.
d.
In a democratic setting, the government’s tax and spending policies can redistribute
income without influencing the size of the economic pie.
e.
Both b and d are correct.
16. Which of the following is true?
a.
During any given year, the size of the economic pie available for allocation to individuals
is fixed.
b.
When the link between worker productivity and reward is weakened, individuals have less
incentive to create income.
c.
If they reduce income inequality, taxes and income transfers will not alter the incentive of
individuals to engage in productive activity.
d.
The total output of an economy is unrelated to the distribution of income.
17. Government programs that take money from high-income people and give it to low-income people
typically
a.
improve economic efficiency because they reducing poverty.
b.
reduce economic efficiency because they distort incentives.
c.
have no effect on economic efficiency because they both reduce poverty and distort
incentives.
d.
sometimes improve, sometimes reduce, and sometimes have no effect on economic
efficiency.
18. If the marginal productivity of labor was the sole determinant of household income in the U.S., then
a.
no households would be poor according to the official government definition of poverty.
b.
no households would be poor according to a relative definition of poverty.
c.
the distribution of income would be unequal.
d.
every household would have sufficient income to meet biological needs.
19. Welfare data show that in the United States
a.
most welfare recipients receive benefits only for a short time.
b.
welfare encourages young women to have children.
c.
children brought up on welfare tend to remain on welfare as adults.
d.
having poor parents does not increase the chances of a child’s being on welfare as an adult.
e.
children of poor parents have a 50 percent chance of being middle-income adults.
20. Which of the following is true?
a.
Taxes and transfers generally increase the income share of the bottom quintile of income
recipients, while reducing the share of the top group of earners.
b.
In a market economy, the distribution of income is determined by the quantity and value
of the resources supplied by the various individuals, and nearly half the value of resources
owned by the rich was inherited.
c.
Between 1980 and 2009, the income share received by the highest quintile of earners fell,
while the share received by the bottom quintile of earners rose.
d.
All of the above are true.
21. It would be more reasonable to use annual income data as an index of economic inequality if all of the
households
a.
filed tax returns and thus all their income were known.
b.
were different with regard to their age and size characteristics.
c.
were more similar with regard to size, age, education, and other major factors that are
linked to income.
d.
were more similar with regard to their hair color, height, and weight.
22. Compared to low-income families, upper-income families are likely to
a.
be larger in size.
b.
be headed by an adult of prime working age (between 35 years and 64 years).
c.
have more than one family member working.
d.
be all of the above.
23. Compared to those with lower incomes, families with higher incomes are more likely to be headed by
a
a.
person age 65 years and older.
b.
husband and wife team with one but not the other in the labor force.
c.
single-parent.
d.
college graduate.
24. Compared to high-income families, low-income families tend to have
a.
more earners per family.
b.
fewer persons per family.
c.
more full-time workers per family.
d.
both b and c.
25. Which of the following groups are overrepresented among those with low incomes?
a.
youthful inexperienced workers
b.
college students working on graduate degrees
c.
single-parent families
d.
all of the above
26. Compared to those with higher incomes, low-income families are more likely to
a.
be headed by a person between 35 and 55 years of age.
b.
have both a husband and a wife in the labor force.
c.
be single-parent families.
d.
be headed by a college graduate.
27. Since 1980, income inequality (as measured by the income share of the highest 20 percent of income
earners relative to the lowest 20 percent) has
a.
been virtually unchanged.
b.
increased.
c.
decreased.
d.
fluctuated in a random pattern.
28. Most studies indicate that the degree of income inequality in the United States has
a.
been increasing in recent decades.
b.
been declining in recent decades.
c.
been constant since 1970.
d.
fluctuated widely from year to year.
29. Why have the earnings of persons with less education (and skill) fallen relative to those with more
education (and skill)?
a.
more regulation of the transport industry
b.
more powerful unions
c.
international competition
d.
all of the above
30. Over the past two decades, the earnings gap between college graduates and those with only a high
school education has
a.
decreased substantially.
b.
increased substantially.
c.
remained the same.
d.
fluctuated in a random pattern.
31. The sharp reduction in marginal tax rates during the 1980s
a.
reduced the incentive of high-income Americans to work.
b.
increased the incentive of high-income Americans to utilize tax shelters.
c.
increased the unemployment rate of high-income Americans.
d.
increased the visible income of high-income Americans.
32. Which of the following contributed to the increase in income inequality among families in the United
States during the 1980s and 1990s?
a.
an increase in the highest marginal tax rates that forced high income earners to work more
in order to maintain their income
b.
an increase in the proportion of both single-parent and dual-earner families
c.
a decrease in the size of the earnings differential between college graduates and high
school graduates
d.
all of the above
33. 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.
34. Income mobility
a.
is a term used to characterize the ease of establishing residence or a business in a new area
of the country.
b.
has increased in recent years because of reductions in transportation cost.
c.
is the term used to describe the movements up and down the economic ladder.
d.
is present only when the general level of prices is rising.
35. If substantial income mobility is present,
a.
there is considerable movement of individuals up and down the income ladder when
income comparisons among the same individuals or households are made at different
points in time.
b.
annual income data are an accurate indicator of the long-term economic status of
individuals and families.
c.
the rich tend to stay rich and the poor tend to stay poor.
d.
individuals and families move quite often among the geographic regions of a country but
not among income groups.
36. Which of the following is true?
a.
With time, most of those with low incomes at a point in time move up the income ladder
only to be replaced by others who are youthful, inexperienced, or the victim of current
misfortune.
b.
Recent studies indicate that there is virtually no relationship between the relative income
position of grandparents and their grandchildren.
c.
Both a and b are true.
d.
Neither a nor b is true.
37. Data on income inequality in the United States indicate that
a.
rich families stay rich and poor families stay poor.
b.
most poor families never significantly rise above the poverty level, but rich families tend
to become less wealthy over time.
c.
there is substantial movement among income groupings in the United States.
d.
the inequality between the rich and poor in annual consumption expenditures is greater
than the parallel inequality in annual income.
38. Which of the following is accurate regarding income statistics?
a.
Current annual income is also an accurate indicator of relative economic status for the
same individual over a longer period such as a decade or lifetime.
b.
When there is substantial income mobility, one’s current position in the income
distribution will not be a very good indicator as to what one’s position will be a few years
in the future.
c.
Recent studies indicate that there is a strong positive relationship between the relative
income position of a family and the relative income position of their children and
grandchildren.
d.
Even though annual income data camouflage the fact, high-income earners generally
maintain their status year after year, while those with low current incomes tend to stay
poor year after year.
39. Measuring poverty using an absolute income scale like the poverty line can be misleading because
a.
income measures do not include the value of in-kind transfers.
b.
money is valued less highly by the poor than by the rich.
c.
the poor are not likely to participate in the labor market.
d.
income measures are adjusted for the effects of labor-market discrimination.
40. Which of the following contributed most to the large increases in poverty since 1960?
a.
increases in air pollution and other externalities
b.
federal government budget deficits
c.
the increase in the number of elderly individuals
d.
rising poverty rates among households headed by females
e.
the increase in the number of households headed by females
41. The poverty threshold income level equals the
a.
average income of the bottom one-tenth of all income recipients.
b.
cost of an economical and nutritional food plan for a family multiplied by six.
c.
cost of an economical and nutritional food plan for a family multiplied by three.
d.
average income of a family headed by a worker who has been unemployed for six months
or more.
42. The level of money income below which a family is considered poor is called the
a.
bottom 20 percent of the income distribution.
b.
poverty threshold income level.
c.
guaranteed income level.
d.
subsistence income level.
43. The poverty threshold income level is
a.
an absolute amount that applies to all families equally (i.e., $20,000 household earnings
for 2010).
b.
variable with respect to family size and composition.
c.
adjusted once each decade, with the census numbers.
d.
all of the above.
44. Which of the following is not counted as income when the official poverty rate is calculated?
a.
Medicaid benefits
b.
dividends derived from the ownership of stock
c.
earnings derived from a part-time job
d.
money income derived from transfer payments
45. Which of the following benefits is counted as income when the official poverty rate is calculated?
a.
Medicaid benefits
b.
food stamps
c.
public housing benefits
d.
none of the above
e.
all of the above
46. In 2010, the percentage of all U.S. families officially considered to be in poverty was approximately
a.
5 percent.
b.
11 percent.
c.
22 percent.
d.
31 percent.
47. According to the official measure of poverty, in 2010 the poverty rate of families in the United States
was
a.
4.2 percent.
b.
11.1 percent.
c.
18.5 percent.
d.
22 percent
48. What percent of the families classified as poor in 2010 were headed by an elderly (age 65 and over)
person?
a.
approximately two-thirds
b.
approximately 9 percent
c.
approximately 32 percent
d.
approximately 50 percent
49. The official poverty rate of elderly families
a.
has been virtually unchanged for the last four decades.
b.
increased as the elderly became a larger proportion of the U.S. population during the
1970s.
c.
rose prior to the War on Poverty programs of the late 1960s, but it has declined steadily
since.
d.
has declined during the last four decades.
50. During 1959 through 2010, the percent of poor families headed by an elderly person
a.
rose.
b.
steadily declined.
c.
remained virtually unchanged.
d.
steadily increased until 1980 when it began to decline.
51. In 2010, the proportion of all poverty-level families headed by a female was
a.
approximately one-fourth.
b.
approximately one-third.
c.
approximately half.
d.
more than three-fourths.
52. Which of the following statements regarding poverty in the United States is correct?
a.
There are as many poor African Americans as there are poor whites.
b.
The incidence of poverty is lower among females than among males.
c.
The incidence of poverty is higher among African Americans than among whites.
d.
Most of the poor people in the United States are elderly (over age 65).
53. Analysis of the economic status of poor people reveals that
a.
most are poor because they did not have the opportunity to obtain training and a quality
education.
b.
most had poor parents, grandparents, and great-grandparents, suggesting that poverty is
inherited.
c.
the poverty population is very homogeneous regarding opportunity, cultural
disadvantages, alcoholism, and other personal contributing factors.
d.
poverty is a complex issue; the poor are a heterogeneous population, and the causes of
poverty are multidimensional.
54. Which one of the following groups has a below-average incidence of poverty?
a.
persons who are divorced or separated from their spouse
b.
families headed by a female
c.
persons 18 to 24 years of age
d.
married-couple families
55. Programs that limit the eligibility of transfer recipients to those with low income are called
a.
social security programs.
b.
means-tested programs.
c.
single-parent family programs.
d.
social insurance programs.
56. Means-tested income transfers refer to
a.
the average amount of the annual governmental transfers.
b.
transfers that are limited to families with an income below a certain cutoff point.
c.
income transfers that are specifically paid for by the top 1 percent (wealthiest) of tax
payers.
d.
none of the above.
57. As the War on Poverty programs were instituted and transfer payments expanded in the last half of the
1960s, what happened to the poverty rate?
a.
After rising for several decades, the official poverty rate has been declining since 1968.
b.
After falling for several decades, the official poverty rate leveled off in the 1970s, and it
has been relatively stable since that time.
c.
The poverty rate declined prior to the War on Poverty period, and it has continued to
decline.
d.
The poverty rate rose prior to the War on Poverty period and has continued to rise.
58. The phenomenon that describes how transfer programs, which significantly reduce the adversities of
poverty, also reduce the opportunity cost of choices that often lead to poverty is known as
a.
the implicit marginal tax rate.
b.
Gibson’s paradox.
c.
the Phillips curve
d.
the Samaritan’s dilemma.
59. The amount of additional earnings that must be paid explicitly in taxes or implicitly in the form of a
reduction in income supplements is known as the
a.
marginal income tax rate.
b.
implicit marginal tax rate.
c.
explicit benefit-reduction rate.
d.
supplemental income tax rate.
60. How do the high implicit marginal tax rates that often occur when transfer payments are inversely
linked to earnings affect the incentive of poor people to work and earn?
a.
A poor person’s incentive to earn is increased.
b.
A poor person’s incentive to earn is reduced.
c.
The incentive of the poor to earn is unaffected.
d.
The incentive of the poor to earn reported income is increased, but the incentive to earn
unreported income is reduced.
61. Which of the following limits the ability of the current system of transfer programs to increase the
incomes of the able-bodied poor?
a.
The high implicit marginal tax rates that accompany the current income transfer programs
reduce the incentive of the poor to earn.
b.
The transfer programs encourage the poor to marry and form dual-earner families.
c.
The transfer programs tend to increase the wages that employers are required by law to
pay for low-skill labor.
d.
The transfer programs reduce the likelihood of single-parent families.