The original U.S. poverty line, developed in the 1960s, was built from the cost of which item for a family of a given size, multiplied by three?
A nutritionally adequate diet
✓
Rent for a modest apartment
Basic medical care
Home heating and electricity
Correct Answer
A nutritionally adequate diet
The original poverty line took the cost of a nutritionally adequate diet and multiplied it by three, because families at the time spent about one-third of their income on food. Rent for a modest apartment was not the base of the calculation. Basic medical care was not part of the formula. Home heating and electricity were also left out of the original method.
Category: Measuring Poverty
Question 2
A country has a population of 50 million, and 6 million of those people have incomes below the poverty line. What is its poverty rate?
6%
12%
✓
88%
8.3%
Correct Answer
12%
The poverty rate is the number of people below the poverty line divided by the population: 6 million / 50 million = 0.12, or 12%. 6% treats the count in millions as if it were a percentage. 88% is the share of people above the poverty line. 8.3% comes from dividing the population by the number of poor people (50 / 6 = 8.3) and misreading that ratio as a percentage.
Category: Measuring Poverty
Question 3
Suppose every household's income falls by the same 10 percent while the poverty line stays the same. What happens to poverty and inequality?
Poverty and inequality both rise
Poverty falls while inequality rises
Poverty rises while inequality stays the same
✓
Poverty stays the same while inequality falls
Correct Answer
Poverty rises while inequality stays the same
When every income falls by the same percentage, more households drop below the fixed poverty line, but each group keeps the same share of total income, so inequality is unchanged. Poverty and inequality both rise is wrong because the income shares do not change. Poverty falls while inequality rises reverses both effects. Poverty stays the same while inequality falls ignores the households pushed below the line.
Category: Poverty Versus Inequality
Question 4
A program guarantees a single parent $15,000 a year and reduces the benefit by $1 for every $1 she earns. If she takes a job paying $10,000 a year, by how much does her total income rise compared with not working?
$10,000
$5,000
$25,000
$0
✓
Correct Answer
$0
Her benefit falls from $15,000 to $5,000, so earnings of $10,000 plus a benefit of $5,000 still total $15,000, the same as not working, and her gain is $0. This is the poverty trap. $10,000 counts her earnings but ignores the lost benefit. $5,000 is the benefit she keeps, not the change in total income. $25,000 adds her earnings to the full guarantee as if the benefit did not shrink.
Category: The Poverty Trap
Question 5
A program guarantees $12,000 a year and reduces the benefit by 50 cents for every $1 earned. What is the total income of a recipient who earns $8,000?
$16,000
✓
$20,000
$12,000
$8,000
Correct Answer
$16,000
The benefit falls by 0.5 x $8,000 = $4,000, to $8,000, so total income is $8,000 in earnings plus $8,000 in benefits, or $16,000. $20,000 adds the earnings to the full guarantee with no reduction. $12,000 is the result of a dollar-for-dollar reduction, not a 50-cent one. $8,000 counts only the earnings or only the remaining benefit.
Category: The Poverty Trap
Question 6
Which feature of an antipoverty program creates a poverty trap?
Benefits that stay the same whatever a recipient earns
Benefits that fall by about a dollar for each dollar earned
✓
A tax credit that grows as a worker's earnings rise
Benefits limited to five years over a lifetime
Correct Answer
Benefits that fall by about a dollar for each dollar earned
When benefits shrink by nearly a dollar for every dollar earned, working adds little or nothing to total income, which is the poverty trap. Benefits that stay the same whatever a recipient earns do not take away the reward for extra earnings. A tax credit that grows as earnings rise adds to the reward for working. Benefits limited to five years are a time limit meant to encourage work, not a cause of the trap.
Category: The Poverty Trap
Question 7
Policies such as preschool enrichment, better public schools, college grants and job retraining aim to give people with similar talents and effort a fair chance to succeed regardless of family background. What is this approach called?
A poverty trap
A progressive tax
A ladder of opportunity
✓
An estate tax
Correct Answer
A ladder of opportunity
A ladder of opportunity is a set of policies that helps children and adults build skills so their economic outcomes depend on their talents and efforts rather than the circumstances they were born into. A poverty trap is a situation in which working adds little to income. A progressive tax takes a larger percentage of income from higher earners. An estate tax is levied on the value of an inheritance.
Category: Reducing Inequality
Question 8
Which term means the value of everything a household owns, such as savings, investments and home equity, minus its debts, measured at a point in time?
Income
Earnings
Consumption
Wealth
✓
Correct Answer
Wealth
Wealth is a stock: the value of a household's assets minus its debts at a given moment. Income is a flow of money received over a period such as a year. Earnings are the part of income that comes from work. Consumption is spending on goods and services over a period.
Category: Reducing Inequality
Question 9
Over the lowest range of earnings, what happens to the size of the earned income tax credit as a worker earns more?
It increases
✓
It decreases
It stays at zero
It stays at its maximum
Correct Answer
It increases
The earned income tax credit grows with earnings over its lowest range, then levels off and is phased out gradually at higher earnings, which makes working more rewarding for low-income families. It decreases describes the phase-out range at higher earnings. It stays at zero is wrong because low earners do receive the credit. It stays at its maximum describes the flat middle range, not the lowest one.
Category: The Safety Net
Question 10
What do economists call the set of government programs that assist people with incomes at or near the poverty line?
The poverty trap
The safety net
✓
The poverty line
The estate tax
Correct Answer
The safety net
The safety net is the group of programs, such as TANF, SNAP, Medicaid and the earned income tax credit, that support people with low incomes. The poverty trap is a situation in which benefits fall so fast that working adds little income. The poverty line is the income level used to count people as poor. The estate tax is a tax on large inheritances.
Category: The Safety Net
Question 11
The 1996 welfare reform law replaced Aid to Families with Dependent Children with which program?
Earned Income Tax Credit
Supplemental Security Income
Temporary Assistance for Needy Families
✓
Supplemental Nutrition Assistance Program
Correct Answer
Temporary Assistance for Needy Families
The 1996 law replaced AFDC with Temporary Assistance for Needy Families, which gives states fixed federal grants and imposes work requirements and a lifetime time limit. Earned Income Tax Credit dates from 1975 and works through the tax system. Supplemental Security Income gives cash to low-income elderly people and people with disabilities. Supplemental Nutrition Assistance Program, begun in 1964, provides food benefits.
Category: The Safety Net
Question 12
Two families of the same size live in different parts of the continental United States, one in a high-cost city and one in a low-cost rural area. How does the official poverty line treat them?
The city family gets a higher threshold
The rural family gets a higher threshold
Each county sets its own threshold
The same threshold applies to both
✓
Correct Answer
The same threshold applies to both
The official poverty line does not adjust for differences in living costs across regions, so families of the same size face the same income threshold wherever they live, which is a common criticism of the measure. The city family gets a higher threshold is wrong because there is no cost-of-living adjustment by area. The rural family gets a higher threshold is wrong for the same reason. Each county sets its own threshold is wrong because the line is set nationally.
Category: Measuring Poverty
Question 13
Compared with another country's Lorenz curve, what does a Lorenz curve that sags farther below the 45-degree line show?
Greater income inequality
✓
Greater income equality
A lower poverty line
Higher average income
Correct Answer
Greater income inequality
The farther a Lorenz curve bows below the line of perfect equality, the smaller the income shares of the lower groups and the more unequal the distribution. Greater income equality would show as a curve closer to the 45-degree line. A lower poverty line is not shown on a Lorenz curve at all. Higher average income is not shown either, because the curve plots shares, not dollar amounts.
Category: Measuring Inequality
Question 14
On a Lorenz curve graph, what is measured along the horizontal axis?
Cumulative share of total income
Cumulative share of the population
✓
Average household income
The poverty rate
Correct Answer
Cumulative share of the population
The horizontal axis shows the cumulative share of the population, ranked from lowest to highest income, usually in steps of 20 percent. Cumulative share of total income is on the vertical axis. Average household income in dollars is not plotted on a Lorenz curve. The poverty rate is a separate measure that the graph does not show.
Category: Measuring Inequality
Question 15
The bottom quintile of households receives 4% of total income, the second quintile 9% and the third quintile 15%. On a Lorenz curve, what cumulative income share corresponds to the bottom 60% of households?
15%
9.3%
28%
✓
60%
Correct Answer
28%
Cumulative shares are found by adding the shares in order: 4% + 9% + 15% = 28% of income for the bottom 60% of households. 15% is only the third quintile's own share. 9.3% is the average of the three shares, not their total. 60% is the population share, which would be the income share only under perfect equality.
Category: Measuring Inequality
Question 16
The number of college-educated workers in the United States has grown greatly in recent decades, yet their wages have risen relative to those of less-educated workers. According to the demand and supply model, what must have happened?
The supply of skilled labor shrank
The demand for skilled labor fell
The supply of unskilled labor fell
The demand for skilled labor rose more than supply
✓
Correct Answer
The demand for skilled labor rose more than supply
A larger supply of skilled workers alone would lower their wage, so a rising relative wage means demand for skilled labor shifted right by more than supply did, driven largely by technology and globalization. The supply of skilled labor shrank contradicts the growth in college graduates. The demand for skilled labor fell would push their wages down. The supply of unskilled labor fell would raise unskilled wages and narrow the gap.
Category: Causes of Inequality
Question 17
When technology lets the very best performers in a field, such as top executives or star athletes, reach a worldwide audience, their pay can rise far above that of slightly less talented rivals. What are such labor markets called?
Winner-take-all labor markets
✓
Perfectly competitive labor markets
Monopsony labor markets
Union-controlled labor markets
Correct Answer
Winner-take-all labor markets
In winner-take-all labor markets a few top performers capture a very large share of the rewards, because technology lets them serve a huge market. Perfectly competitive labor markets pay workers according to their productivity with no single star dominating. Monopsony labor markets have a single dominant employer. Union-controlled labor markets set pay through collective bargaining.
Category: Causes of Inequality
Question 18
Which change in household composition has tended to increase household income inequality in the United States?
A decline in single-parent households
More high earners marrying other high earners
✓
Fewer two-earner households
Less sorting of spouses by education
Correct Answer
More high earners marrying other high earners
When high earners such as doctors or lawyers marry each other, their combined household incomes pull far ahead of other households, which widens inequality. A decline in single-parent households did not happen; their number has grown, and they tend to have low incomes. Fewer two-earner households is the opposite of the actual trend as more married women joined the paid labor force. Less sorting of spouses by education would reduce inequality, not increase it.
Category: Causes of Inequality
Question 19
A household has total income of $80,000 and pays $12,000 in total taxes. What is its effective tax rate?
17.6%
12%
15%
✓
85%
Correct Answer
15%
The effective tax rate is total taxes divided by total income: $12,000 / $80,000 = 0.15, or 15%. 17.6% divides taxes by after-tax income of $68,000 instead of total income. 12% treats the tax bill in thousands as a percentage. 85% is the share of income left after taxes.
Category: Reducing Inequality
Question 20
Which tax is levied on the value of property passed on to heirs when a person dies?
Payroll tax
Sales tax
Excise tax
Estate tax
✓
Correct Answer
Estate tax
An estate tax is a tax on the value of what a person leaves to heirs, and in the United States it applies only to very large estates. A payroll tax is taken from wages. A sales tax is charged on purchases. An excise tax is levied on specific goods such as gasoline or tobacco.
Category: Reducing Inequality