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Exam 20: Income Inequality and Poverty

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Question 51

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Scenario 20-2 Suppose that a society is made up of five families whose incomes are as follows: ​ $120,000; $90,000; $30,000; $30,000; and $18,000. ​ The federal government is considering two potential income tax plans: ​ Plan A is a negative income tax plan where the taxes owed equal 1/3 of income minus $20,000. ​ Plan B is a two-tiered plan where families earning less than $35,000 pay no income tax and families earning more than $35,000 pay 10% of their income in taxes. The income tax revenue collected from those families earning over $35,000 is then redistributed equally to those families earning less than $35,000. ​ -Refer to Scenario 20-2. Assuming that utility is directly proportional to the cash value of after-tax income, which government policy would an advocate of libertarianism prefer?

A) Neither Plan A nor Plan B because any plan that forcibly redistributes income is against the philosophy
B) Only Plan A
C) Only Plan B
D) Either Plan A or Plan B

E) A) and B)
F) None of the above

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Question 52

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The poverty rate is the percentage of the population whose family income falls below the poverty line..

A) True
B) False

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Question 53

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When incentives to earn income are distorted by income redistribution programs,

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.

Of the following groups, which group is least likely to live in poverty - whites, blacks, Hispanics, Asians?

Explain what is meant by "in-kind transfer" programs. Briefly outline the advantages and disadvantages of an in-kind transfer program.

Which of the following represents a problem in measuring inequality?

The percentage of the population whose family income falls below an absolute level is call the

Which political philosophy argues that the government should choose policies deemed just, as evaluated by an impartial observer?

Scenario 20-5 Zooey is a single mother of two young children whose husband died in a tragic car accident. She earns $20,000 per year working as a cashier at a grocery store. The government uses a negative income tax system in which Taxes owed = (1/4 of income) - $15,000. -Refer to Scenario 20-5. Does Zooey owe or receive money from the government? How much?

"An extra dollar of income gives more additional satisfaction to a poor person than to a rich person." This is an important assumption of which political philosophy?

What is the term for a measure of happiness or satisfaction a person receives from his or her circumstances?

In the parable of the leaky bucket, a fundamental problem with government redistribution programs is identified. As long as the government only has "leaky buckets" at its disposal,

Table 20-8 Income Inequality in the United States The values in the table reflect the percentages of pre-tax-and transfer income. Source: US Census Bureau $\begin{array}{|l|l|l|l|l|l|l|}\hline \text { Year } & \text { Bottom Fifth } & \text { Second Fifth } & \text { Middle Fifth } & \text { Fourth Fifth } & \text { Top Fifth } & \text { Top 5\% } \\\hline \mathbf{2 0 1 0} & 3.3 \% & 8.5 \% & 14.6 \% & 23.4 \% & 50.2 \% & 21.3 \% \\\hline \mathbf{2 0 0 5} & 3.4 & 8.6 & 14.6 & 23.0 & 50.4 & 22.2 \\\hline \mathbf{2 0 0 0} & 3.6 & 8.9 & 14.8 & 23.0 & 49.8 & 22.1 \\\hline \mathbf{1 9 9 5} & 3.7 & 9.1 & 15.2 & 23.3 & 48.7 & 21.0 \\\hline \mathbf{1 9 9 0} & 3.8 & 9.6 & 15.9 & 24.0 & 46.6 & 18.5 \\\hline \mathbf{1 9 8 5} & 3.9 & 9.8 & 16.2 & 24.4 & 45.6 & 17.6 \\\hline \mathbf{1 9 8 0} & 4.2 & 10.2 & 16.8 & 24.7 & 44.1 & 16.5\\\hline \end{array}$ -Refer to Table 20-8. In 2010, how many more percentage points of total income did the top fifth of the population earn compared to if the income distribution were completely equal?

In 2011 the top 5 percent of income earners accounted for over 50% of all income received by United States' families.

Table 20-9 Income Inequality in 2010 in the United States by Race The values in the table reflect the percentages of pre-tax-and-transfer income. Source: US Census Bureau $\begin{array} { | l | l | l | l | l | l | l | } \hline \text { Race } & \text { Bottom Fifth } & \text { Second Fifth } & \text { Middle Fifth } & \text { Fourth Fifth } & \text { Top Fifth } & \text { Top 5\% } \\\hline \text { Asians } & 3.0 \% & 8.9 \% & 15.3 \% & 24.5 \% & 48.3 \% & 19.0 \% \\\hline \text { Blacks } & 2.7 & 7.9 & 14.2 & 23.6 & 51.6 & 21.4 \\\hline \text { Hisp anics } & 3.5 & 9.0 & 14.7 & 23.3 & 49.4 & 20.6 \\\hline \text { Whites } & 3.6 & 8.8 & 14.9 & 23.4 & 49.3 & 21.0 \\\hline\end{array}$ -Refer to Table 20-9. In percentage point terms, how much more did the top 5% of the Asian population earn than it would have if income were distributed equally?

Explain the relationship between labor earnings and the distribution of income.

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.

Table 20-9 Income Inequality in 2010 in the United States by Race The values in the table reflect the percentages of pre-tax-and-transfer income. Source: US Census Bureau $\begin{array} { | l | l | l | l | l | l | l | } \hline \text { Race } & \text { Bottom Fifth } & \text { Second Fifth } & \text { Middle Fifth } & \text { Fourth Fifth } & \text { Top Fifth } & \text { Top 5\% } \\\hline \text { Asians } & 3.0 \% & 8.9 \% & 15.3 \% & 24.5 \% & 48.3 \% & 19.0 \% \\\hline \text { Blacks } & 2.7 & 7.9 & 14.2 & 23.6 & 51.6 & 21.4 \\\hline \text { Hisp anics } & 3.5 & 9.0 & 14.7 & 23.3 & 49.4 & 20.6 \\\hline \text { Whites } & 3.6 & 8.8 & 14.9 & 23.4 & 49.3 & 21.0 \\\hline\end{array}$ -Refer to Table 20-9. Which race shows the least equal distribution of income?

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.