Question 1

A typical worker's normal or average income is called
A)the life cycle.
B)permanent income.
C)transitory income.
D)in-kind transfers.

Accepted Answer

Permanent income refers to a person's average income over a longer period of time, rather than just their current income at a particular moment. It takes into account factors such as fluctuations in income due to seasonal work or layoffs, and provides a more accurate measure of a person's overall financial situation.

Question 2

Saving and borrowing is indicative of a family that
A)is most likely to be poor.
B)has a difficult time balancing its standard of living.
C)does not adjust its standard of living to reflect transitory changes in income.
D)is most likely millionaires.

Accepted Answer

Families that save and borrow are likely adjusting their standard of living to reflect changes in their income, which indicates that they are not relying solely on their current level of income to support their lifestyle. This is a sign of financial stability and preparedness, rather than poverty or difficulty balancing their standard of living. While it is possible that some families who save and borrow may be millionaires, this is not necessarily indicative of their financial habits.

Question 3

Suppose that Angelo and Sonia each win $500 in a charity raffle. Angelo spends his winnings on a new ipad. Sonia saves her winnings. Which of the following is correct?
A)Both Angelo's and Sonia's behavior suggest that they base their purchasing decisions on transitory income.
B)Angelo's behavior suggests that he bases his purchasing decisions on transitory income rather than permanent income. Sonia's behavior suggest that she bases her purchasing decisions on permanent income rather than transitory income.
C)Angelo's behavior suggests that he bases his purchasing decisions on permanent income rather than transitory income. Sonia's behavior suggests that she bases her purchasing decisions on transitory income rather than permanent income.
D)Both Angelo's and Sonia's behavior suggest that they base their purchasing decisions on permanent income.

Accepted Answer

Angelo's decision to spend his winnings on a new ipad suggests that he views the income as transitory and is not thinking about long-term financial planning. Sonia's decision to save her winnings suggests that she views the income as a supplement to her permanent income and is thinking about long-term financial planning by saving for the future.

Question 4

The Hicks family owns a blueberry farm in Maine. The Ward family owns a blueberry farm in Massachusetts. A drought in Massachusetts destroys half of the Ward family's harvest for one year. For the Ward family, their
A)transitory income for the year of the drought likely exceeds their permanent income.
B)permanent income likely exceeds their transitory income for the year of the drought.
C)transitory income likely will be affected but the permanent income of the Hicks family will increase.
D)permanent income likely will be affected but the permanent income of the Hicks family will not be affected.

Accepted Answer

The drought in Massachusetts only affects the Ward family's income for one year, so it is a transitory income shock. Their permanent income is likely to be higher than their income in the drought year since it is based on their longer-term average income. The Hicks family's income is not likely to be affected by the drought in Massachusetts since they have a separate blueberry farm in Maine.

Question 5

Pietro is 40 years old and is laid off from his job at the paper plant and borrows from his savings for 8 months until he finds a new job. Pietro's
A)transitory income likely exceeds his permanent income for that year.
B)borrowing is representative of a normal economic life cycle.
C)permanent income is largely unaffected by this one time change to his income.
D)economic mobility during this year is highly unusual, as US workers tend to stay in a particular income class.

Accepted Answer

Pietro's borrowing from his savings for 8 months is a transitory change to his income, which means it is temporary and does not reflect a permanent change to his earning potential. Therefore, his permanent income is largely unaffected by this one-time change, making choice C the best answer. Choices A, B, and D are incorrect because they do not accurately describe the situation. Transitory income refers to short-term fluctuations in income, not a long-term loss of a job. Borrowing from savings is not necessarily representative of a normal economic life cycle, and economic mobility during a year is not necessarily highly unusual, as many factors can contribute to changes in income.

Question 6

For a typical worker, her income will be lower when she is younger, peak around age 50, and decrease drastically when she retires. This pattern of changes in income for a typical worker is called
A)the life cycle.
B)permanent income.
C)transitory income.
D)in-kind transfers.

Accepted Answer

The described pattern of changes in income is known as the life cycle. It reflects the fact that workers typically start their careers with lower salaries and steadily increase their earnings through promotions and experience until they reach their peak around age 50. After that, their income usually decreases either due to retirement or reduced work hours. This cyclical pattern of income is a common feature of many people's working lives. The other options, permanent income, transitory income, and in-kind transfers, do not accurately describe this pattern.

Question 7

Suppose that Family A borrows money when its car breaks down and saves money when the wife receives a holiday bonus from her employer. Suppose that Family B borrows money to buy elaborate birthday presents for the children and spends the husband's holiday bonus on a vacation to Florida. Which of the following is correct?
A)Both Family A's and Family B's spending habits suggest that they base their purchasing decisions on transitory income.
B)Family A's spending habits suggest that it bases its purchasing decisions on transitory income rather than permanent income. Family B's spending habits suggest that it bases its purchasing decisions on permanent income rather than transitory income.
C)Family A's spending habits suggest that it bases its purchasing decisions on permanent income rather than transitory income. Family B's spending habits suggest that it bases its purchasing decisions on transitory income rather than permanent income.
D)Both Family A's and Family B's spending habits suggest that they base their purchasing decisions on permanent income.

Accepted Answer

The answer of Suppose that Family A borrows money when...

Question 8

Suppose that young people often borrow and then repay the loans when they are older. These actions relate to which problem in measuring inequality?
A)in-kind transfers
B)the economic life cycle
C)a negative income tax
D)economic mobility

Accepted Answer

The answer of Suppose that young people often borrow and...

Question 9

The typical economic life cycle illustrates how people tend to
A)borrow more when they are younger and save more when they are middle-aged.
B)earn their peak incomes immediately prior to the typical retirement age of 65.
C)adjust their consumption based on changes in their transitory income.
D)All of the above are correct.

Accepted Answer

The typical economic life cycle theory suggests that individuals tend to borrow more when they are younger (to finance education and housing) and save more when they are middle-aged (to prepare for retirement). Additionally, people tend to earn their peak incomes in their late 40s or early 50s, rather than immediately prior to retirement at age 65. Finally, individuals may adjust their consumption based on changes in their transitory income, such as a temporary increase or decrease in their salary. Therefore, choice A is the best answer.

Question 10

Miguel is a 20 year old college student who works part-time and earns an annual income of $12,000. To smooth out his life cycle changes in income, Miguel can
A)save his earnings to use when he is middle-aged.
B)lend money to a friend to purchase a new car.
C)borrow money to pay for college, which he will later repay when his income rises.
D)attempt to pay for college from his current earnings.

Accepted Answer

Borrowing money to pay for college allows Miguel to invest in his future earning potential and increase his income in the long run. This will help him smooth out his life cycle changes in income. Saving his earnings may not be enough to cover for future expenses and he may end up not investing in himself. Lending money to a friend would not serve Miguel's best interest and it may put financial strain on their friendship. Attempting to pay for college from his current earnings may not be feasible and may lead to financial stress that could negatively impact his studies.

Question 11

The Callaway family owns a small bait and tackle shop in a resort town in Wisconsin. An economic recession reduces the number of tourists for one summer, which reduces the family's income for that year. For the Callaway family, their
A)transitory income for the year of the recession likely exceeds their permanent income.
B)permanent income likely exceeds their transitory income for the year of the recession.
C)permanent income will be more affected by the recession than their transitory income.
D)Both a and c are correct.

Accepted Answer

Permanent income refers to the average income over a longer period of time, and is usually a better predictor of long-term consumption patterns. Since the recession only affected income for one year, it is likely that the Callaway family's permanent income will still be higher than their income during the recession. Therefore, option B is the correct answer. Option A is incorrect because transitory income refers to short-term fluctuations in income, which are likely to be lower during the recession. Option C is also incorrect because permanent income is less affected by short-term fluctuations in income.

Question 12

The study by economists Cox and Alm found
A)the gap between rich and poor shrinks greatly if using after-tax income compared with pre-tax income.
B)the gap between rich and poor shrinks slightly if using after-tax income compared with pre-tax income.
C)the gap between rich and poor widens slightly if using after-tax income compared with pre-tax income.
D)the gap between rich and poor widens greatly if using after-tax income compared with pre-tax income.

Accepted Answer

The study by economists Cox and Alm found that the gap between rich and poor shrinks slightly if using after-tax income compared with pre-tax income.

Question 13

Which of the following statements is not correct?
A)The percentage of the population that suffers from long-term poverty is far smaller than the percentage of the population that suffers from short-term poverty because there is a high level of economic mobility in the United States.
B)Permanent income is a better measure of a family's ability to buy the necessities of life than is transitory income.
C)The economic life cycle theory explains why gifts of goods and services reduce poverty for the very young and the very old.
D)Because people can borrow and save to smooth out changes in income, their standard of living in any one year depends more on lifetime income than on a particular year's income.

Accepted Answer

The answer of Which of the following statements is not...

Question 14

A family's ability to buy goods and services depends largely on its
A)permanent income, which is its normal, or average, income.
B)permanent income, which is the lowest annual income the family has received over a 10-year period.
C)transitory income, which is the measure of income used by the government to analyze the distribution of income and the poverty rate.
D)transitory income, which is its money income plus any in-kind transfers it receives.

Accepted Answer

Permanent income, which is the family's normal or average income, is a more reliable measure for the family's ability to purchase goods and services as it takes into account their long-term income stability rather than short-term fluctuations in income. Transitory income, which includes temporary boosts in income such as bonuses, is less reliable for determining a family's ability to buy goods and services.

Question 15

The Smith family owns an apple orchard in Illinois. The Jones family owns an apple orchard in Wisconsin. A late frost destroys half of the Smith family's harvest for one year. For the Jones family, their
A)transitory income for the year of the frost likely exceeds their permanent income.
B)permanent income likely exceeds their transitory income for the year of the frost.
C)permanent income will be more affected by the frost than their transitory income.
D)Both a and c are correct.

Accepted Answer

The answer of The Smith family owns an apple orchard...

Question 16

The study by economists Cox and Alm found that the 2006 after-tax income of the richest fifth of U.S. households is
A)equal to the after-tax income of the poorest fifth.
B)7 times the after-tax income of the poorest fifth.
C)14 times the after-tax income of the poorest fifth.
D)21 times the after-tax income of the poorest fifth.

Accepted Answer

The answer of The study by economists Cox and Alm...

Question 17

The study by economists Cox and Alm found
A)inequality in consumption is much smaller than inequality in annual income.
B)inequality in consumption is slightly smaller than inequality in annual income.
C)inequality in consumption is slightly larger than inequality in annual income.
D)inequality in consumption is much larger than inequality in annual income.

Accepted Answer

The answer of The study by economists Cox and Alm...

Question 18

Suppose that a family saves and borrows to buffer itself against changes in income. These actions relate to which problem in measuring inequality?
A)in-kind transfers
B)negative income tax
C)transitory versus permanent income
D)economic mobility

Accepted Answer

The problem in measuring inequality that is addressed by a family's actions to save and borrow is the distinction between transitory and permanent income. Transitory income refers to temporary fluctuations in income, while permanent income is a more stable and predictable measure of someone's long-term earning potential. By saving and borrowing, families can smooth out the impact of transitory income shocks and maintain a more consistent standard of living over time. This makes it more difficult to accurately measure inequality based on a snapshot of income at a single point in time.

Question 19

Which of the following is not a finding of Cox and Alm regarding the gap between rich and poor?
A)The gap shrinks if taxes are taken into account.
B)The gap shrinks if consumption, rather than income, is compared.
C)The gap shrinks if the number of people in the household is taken into account.
D)The gap shrinks if the state of residence is taken into account.

Accepted Answer

Cox and Alm found that the gap between rich and poor does not shrink significantly when the state of residence is taken into account.

Question 20

The study by economists Cox and Alm found that the 2006 pre-tax income of the richest fifth of U.S. households is
A)5 times the pre-tax income of the poorest fifth.
B)10 times the pre-tax income of the poorest fifth.
C)15 times the pre-tax income of the poorest fifth.
D)20 times the pre-tax income of the poorest fifth.

Accepted Answer

The answer of The study by economists Cox and Alm...

Quiz 20: Income Inequality and Poverty

A typical worker's normal or average income is called

Saving and borrowing is indicative of a family that

Suppose that Angelo and Sonia each win $500 in a charity raffle. Angelo spends his winnings on a new ipad. Sonia saves her winnings. Which of the following is correct?

The Hicks family owns a blueberry farm in Maine. The Ward family owns a blueberry farm in Massachusetts. A drought in Massachusetts destroys half of the Ward family's harvest for one year. For the Ward family, their

Pietro is 40 years old and is laid off from his job at the paper plant and borrows from his savings for 8 months until he finds a new job. Pietro's

For a typical worker, her income will be lower when she is younger, peak around age 50, and decrease drastically when she retires. This pattern of changes in income for a typical worker is called

Suppose that young people often borrow and then repay the loans when they are older. These actions relate to which problem in measuring inequality?

The typical economic life cycle illustrates how people tend to

Miguel is a 20 year old college student who works part-time and earns an annual income of $12,000. To smooth out his life cycle changes in income, Miguel can

The Callaway family owns a small bait and tackle shop in a resort town in Wisconsin. An economic recession reduces the number of tourists for one summer, which reduces the family's income for that year. For the Callaway family, their

The study by economists Cox and Alm found

Which of the following statements is not correct?

A family's ability to buy goods and services depends largely on its

The Smith family owns an apple orchard in Illinois. The Jones family owns an apple orchard in Wisconsin. A late frost destroys half of the Smith family's harvest for one year. For the Jones family, their

The study by economists Cox and Alm found that the 2006 after-tax income of the richest fifth of U.S. households is

The study by economists Cox and Alm found

Suppose that a family saves and borrows to buffer itself against changes in income. These actions relate to which problem in measuring inequality?

Which of the following is not a finding of Cox and Alm regarding the gap between rich and poor?

The study by economists Cox and Alm found that the 2006 pre-tax income of the richest fifth of U.S. households is