True / False
1. The invisible hand of the marketplace acts to allocate resources efficiently, but it does not necessarily ensure that
resources are allocated fairly.
a.
True
b.
False
2. When the government enacts policies to make the distribution of income more equitable, it distorts incentives, alters
behavior, and makes the allocation of resources less efficient.
a.
True
b.
False
3. The United States has more income inequality than Japan, Germany, and France.
a.
True
b.
False
4. The United States has more income inequality than Brazil and South Africa.
a.
True
b.
False
5. The United States has a more unequal income distribution than many other developed countries such as Japan and
Germany.
a.
True
b.
False
6. The United States has a more equal income distribution than many developing economies such as Mexico, South
Africa, and Brazil.
a.
True
b.
False
7. Among all countries in the world, the United States has the most income inequality.
a.
True
b.
False
8. In the United States in 2011, the bottom fifth of the income distribution had incomes below $27,218.
a.
True
b.
False
9. The top 5 percent of U.S. annual family income in 2011 was $205,200 or more.
a.
True
b.
False
10. A U.S. family earning $80,000 would be in the top 20 percent of income distribution in 2011.
a.
True
b.
False
11. An income distribution may not give an accurate picture of the standard of living for the poor because it does not
include in-kind transfers.
a.
True
b.
False
12. Since 1970 the United States’ income distribution has become more equal.
a.
True
b.
False
13. In 2011 the top 20% of income earners accounted for over 80% of all income received by United States’ families.
a.
True
b.
False
14. In 2011 the top 5 percent of income earners accounted for over 50% of all income received by United States’ families.
a.
True
b.
False
15. In the United States from 1935 to 2011 the share of total income earned by the bottom fifth of income earners rose and
then fell.
a.
True
b.
False
16. Despite continued growth in average income since the early 1970s, the poverty rate has not declined below the level
reached in 1973.
a.
True
b.
False
17. Even though the average income in the United States has continued to grow, the poverty rate has increased to over
20% since the early 1970s.
a.
True
b.
False
18. The measured poverty rate may not reflect the true extent of economic deprivation because it does not include some
forms of government assistance.
a.
True
b.
False
19. 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.”
a.
True
b.
False
20. The poverty line is an absolute standard and is based on the cost of providing an adequate diet.
a.
True
b.
False
21. The poverty line is based on the percentage of people who cannot afford an adequate diet.
a.
True
b.
False
22. The poverty rate is the percentage of the population whose family income falls below the poverty line..
a.
True
b.
False
23. The poverty rate is an absolute level of income set by the federal government for each family size. A family with
income below this rate is deemed to be in poverty.
a.
True
b.
False
24. The elderly represent the largest demographic group in poverty.
a.
True
b.
False
25. About half of black and Hispanic children in female-headed households live in poverty.
a.
True
b.
False
26. Standard measurements of the degree of income inequality take both money income and in-kind transfers into account.
a.
True
b.
False
27. The economic life cycle describes how young people usually have higher savings rates than middle-aged people.
a.
True
b.
False
28. Many economists believe that a family bases its spending decisions on its permanent, or average, income rather than
on transitory income.
a.
True
b.
False
29. Most economists believe that a family bases its spending decisions on its transitory income.
a.
True
b.
False
30. About four out of five millionaires in the United States earned their money rather than inherited it.
a.
True
b.
False
31. Fewer than three percent of families are poor for eight or more years.
a.
True
b.
False
32. There is very little economic mobility in the United States, which means that once a family is poor, it is very likely to
remain poor for at least a decade.
a.
True
b.
False
33. According to a study by Michael Cox and Richard Alm, consumption per person in the richest 20% of households was
only 2.1 times consumption per person in the poorest 20% of households.
a.
True
b.
False
34. Utilitarians believe that the proper goal of the government is to maximize the sum of the utilities of everyone in
society.
a.
True
b.
False
35. The utilitarian justification for redistributing income is based on the assumption of diminishing marginal utility.
a.
True
b.
False
36. John Rawls, who developed the way of thinking called liberalism, argued that government policies should be aimed at
maximizing the sum of utility of everyone in society.
a.
True
b.
False
37. If a government could successfully achieve the maximin criterion, each member of society would have an equal
income.
a.
True
b.
False
38. A follower of liberalism would not support a redistribution of income but rather would focus on equalizing
opportunities.
a.
True
b.
False
39. The maximin criterion is the idea that the government should aim to maximize the well-being of the worst-off person
in society.
a.
True
b.
False
40. According to libertarians, the government should redistribute income from rich individuals to poor individuals to
achieve a more equal distribution of income.
a.
True
b.
False
41. Libertarians believe that the government should enforce individual rights to ensure that all people have the same
opportunities to use their talents to achieve success.
a.
True
b.
False
42. A goal of libertarians is to provide citizens with equal opportunities rather than to ensure equal outcomes.
a.
True
b.
False
43. Critics argue that a disadvantage of minimum-wage laws is that they do not effectively target the working poor
because many minimum-wage workers are the teenage children of middle-income families.
a.
True
b.
False
44. Temporary Assistance for Needy Families (TANF) is an example of a negative income tax program.
a.
True
b.
False
45. The Supplemental Security Income (SSI) program focuses on the poor who are sick or disabled.
a.
True
b.
False
46. One existing government program that works much like a negative income tax is the Earned Income Tax Credit.
a.
True
b.
False
47. One existing government program that works much like a negative income tax is Medicaid.
a.
True
b.
False
48. An advantage of a negative income tax is that it does not encourage the breakup of families because the only criterion
for assistance is family income.
a.
True
b.
False
49. Critics argue that a disadvantage of the Earned Income Tax Credit is that it does not effectively target the working
poor because many recipients are the teenage children of middle-income families.
a.
True
b.
False
50. A disadvantage of the Earned Income Tax Credit (EITC) program is that it does not help alleviate poverty due to
unemployment, sickness, or other inability to work.
a.
True
b.
False
Scenario 20-8
Suppose the government implemented a negative income tax and used the following formula to compute a family’s tax
liability:
Taxes owed = (1/4 of income) – $14,000
51. Refer to Scenario 20-8. A family earning $40,000 before taxes will owe tax.
a.
True
b.
False
52. Refer to Scenario 20-8. A family earning $56,000 before taxes will have $56,000 after tax.
a.
True
b.
False
53. Refer to Scenario 20-8. This negative income tax ensures that families earn at least $56,000.
a.
True
b.
False
54. Refer to Scenario 20-8. The government does not have to pay a subsidy to any family through this negative income
tax if the family with the lowest income earns $50,000.
a.
True
b.
False
55. Refer to Scenario 20-8. The government does not receive any tax revenue through this negative income tax if the
family with the highest income earns $56,000.
a.
True
b.
False