Chapter 20 Mankiw/Taylor, Economics

Name:

True/False
Indicate whether the sentence or statement is true or false.

In 2002 in the UK, the top fifth of the income distribution had income greater than the bottom three fifths of the income distribution combined.

The distribution of income in the UK became more equal between 1979 and 1990.

According to the World Development Report published in 2002 the United States was among the world’s most equal societies and South Africa among the most unequal.

The increase in the labour force participation of women that was generated by the women's movement has helped to narrow the income distribution.

Because of in-kind transfers to the poor and because people's incomes vary from year to year and across their lifetimes, standard measures of income distribution exaggerate the degree of inequality in standards of living.

The political philosophies of utilitarianism and liberalism both suggest that income should be equalized across the population.

Utilitarianism is based on the assumption of diminishing marginal product.

Libertarians are more concerned with equal opportunity than with equal outcome.

Robert Nozick argues that economic justice would result if society chose a set of rules for the redistribution of income from behind a "veil of ignorance" and he argues that the set of rules would be the maximin criterion.

10.

If the demand for labour is relatively inelastic, an increase in the minimum wage will increase unemployment among unskilled workers by a relatively small amount.

11.

It is more efficient for the government to provide in-kind transfers instead of cash payments.

12.

If permanent income were utilized to measure the income distribution instead of current annual income, the income distribution would appear to be wider.

13.

There is an easy and perfectly acceptable solution to the problem of poverty traps: recipients’ benefit income should be reduced more gradually as they increase their earnings.

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

14.

In 2002 in the UK, the top fifth of the income distribution had income

a.	about half of all income. See Table 20.2 in the textbook.
b.	about the same as the bottom fifth of the income distribution. See Table 20.2 in the textbook.
c.	about ten times what the bottom fifth of the income distribution earns. See Table 20.2 in the textbook.
d.	greater than the bottom three fifths of the income distribution combined. See Table 20.2 in the textbook.

15.

Compared to other countries, the income distribution in the UK is

a.	more unequal than in the United States but more equal than in Brazil. See Table 20.3 in the textbook.
b.	more unequal than in Germany but more equal than in the United States. See Table 20.3 in the textbook.
c.	the most unequal. See Table 20.3 in the textbook.
d.	the most equal. See Table 20.3 in the textbook.

16.

Because in-kind transfers are not accounted for in standard measures of income distribution, the standard measures of income distribution

a.	accurately represent the true inequality of living standards.
b.	understate the inequality of living standards.
c.	exaggerate the inequality of living standards.
d.	could exaggerate or understate the inequality of living standards depending on whether the transfers are goods or services.

17.

Permanent income is

a.	Social Security income of the elderly and disabled.
b.	none of these answers.
c.	wages fixed by a union or other labour contract.
d.	equal to the minimum wage.
e.	a person's normal, or average, income.

18.

A period of unemployment due to recession will:

a.	increase a worker’s current income and permanent income.
b.	reduce a worker’s current income but not necessarily their permanent income
c.	affect neither the current nor the permanent income of a worker.
d.	reduce a worker’s permanent income but not their current income.

19.

Because people's incomes vary over the life cycle and because there are transitory shocks to people's incomes, the standard measures of income distribution

a.	exaggerate the inequality of living standards.
b.	could exaggerate or understate the inequality of living standards depending on whether the transitory shocks are positive or negative.
c.	understate the inequality of living standards.
d.	accurately represent the true inequality of living standards.

20.

If people can borrow and lend to perfectly smooth out their lifetime living standards, then

a.	transitory income is a good measure of the distribution of living standards.
b.	none of these answers.
c.	permanent income is a good measure of the distribution of living standards.
d.	life-cycle income is a good measure of the distribution of living standards.
e.	current annual income is a good measure of the distribution of living standards.

21.

Marie earns more than Seamus and she came by her income fairly and honestly. Which of the following political philosophies would argue against the redistribution of income from Marie to Seamus?

a.	all of these answers
b.	libertarianism
c.	liberalism
d.	utilitarianism
e.	none of these answers

22.

The maximin criterion suggested by Rawls's theory of justice means that the government should aim to

a.	maximize the total utility of society.
b.	maximize the well-being of the worst-off person in society.
c.	minimize the difference between the rich and poor.
d.	maximize the economic freedom of individuals by minimizing government interference in private decision making.
e.	minimize the well-being of the best-off person in society.

23.

Rank utilitarianism, liberalism, and libertarianism in sequence from the political philosophy that would redistribute income the greatest to the one that would redistribute income the least.

a.	utilitarianism, liberalism, libertarianism
b.	All three political philosophies argue for similar degrees of income redistribution.
c.	liberalism, libertarianism, utilitarianism
d.	libertarianism, liberalism, utilitarianism
e.	liberalism, utilitarianism, libertarianism

24.

Utilitarianism suggests that the government should choose policies that maximize the total utility of everyone in society by

a.	redistributing income from rich to poor because this is what the members of society would choose to do if they were behind a "veil of ignorance."
b.	redistributing income from rich to poor because, due to the diminishing marginal utility of income, taking a pound from the rich reduces their utility by less than the gain in utility generated by giving a pound to the poor.
c.	allowing each individual to maximize their own utility without interference from the government.
d.	redistributing income from rich to poor because this would maximize the well-being of the worst-off person in society.

25.

Rawls’s suggestion that policy should be directed at maximizing the welfare of the least well off person in society is derived from

a.	the idea that people should consider policy as if behind a veil of ignorance as to what their circumstances might be in society, and the idea that as long as there is no theft then there is no need for governments to intervene and redistribute income.
b.	the idea that people should consider policy as if behind a veil of ignorance as to what their circumstances might be in society, and the idea that people will then be particularly concerned about the possibility that they might find themselves at the bottom of the income distribution.
c.	the idea that people should consider policy as if behind a veil of ignorance as to what their circumstances might be in society, and the ignorant people should be looked after.
d.	the idea that everyone in society should have an equal income.

26.

Rawls’s maximin criterion does not mean that there should be redistribution so as to equalise everyone’s incomes in society because

a.	such redistribution would mean that those who worked hard were no better off than those who were lazy and this would be unfair.
b.	such redistribution would not maximize the total income of all members of society.
c.	such redistribution would remove the incentive to work hard, so society’s total income would fall, and so the least well off person would be worse off than they could be under a system in which there was some inequality in income.
d.	such redistribution would amount to confiscation of honestly earned income from higher earners and so would be unjust.

27.

An increase in the minimum wage will cause a relatively large increase in unemployment among

a.	unskilled workers if the demand for labour is relatively inelastic.
b.	unskilled workers if the demand for labour is relatively elastic.
c.	skilled workers if the demand for labour is relatively elastic.
d.	skilled workers if the demand for labour is relatively inelastic.

28.

Current anti-poverty programs discourage work because

a.	benefits are reduced at such a high rate when recipients earn more income that there is little or no incentive to work once one is receiving benefits.
b.	in order to be eligible for benefits, a recipient cannot have a job.
c.	they make recipients more comfortable than most middle-class citizens.
d.	anti-poverty programs attract naturally lazy people to begin with.

29.

The greatest advantage of a negative income tax is that it

a.	generates a smaller disincentive to work than most alternative anti-poverty policies.
b.	reduces the cost to the government of fighting poverty.
c.	would not provide benefits to lazy people.
d.	ensures that the poor actually receive what the government thinks they need.
e.	does all of these answers.

30.

The poverty trap refers to

a.	a situation in which those receiving state benefits may be almost no better off if they choose to work more to earn more income for themselves and their families because doing so will mean they have to pay back the benefits they have previously received.
b.	a situation in which workers are unable to find jobs.
c.	a situation in which those receiving state benefits may be almost no better off if they choose to work more to earn more income for themselves and their families because doing so will reduce the amount of benefit income to which they are entitled and increase the amount of tax they must pay.
d.	a situation in which those receiving state benefits are discriminated against by employers and so find it more difficult to find jobs.