Addressing income and wealth inequality: Practice Questions

Which government policy would be most effective at directly reducing wealth inequality, as opposed to solely addressing income inequality?

A government shifts its tax structure by reducing progressive income taxes and increasing indirect taxes (such as VAT or GST) on basic consumer goods.
What is the most likely impact of this shift on the Lorenz curve and equity?

Which government policy is specifically intended to reduce the poverty trap (the situation where low-income earners have little incentive to increase their earnings due to the withdrawal of benefits)?

A country is said to have a relative poverty problem if a segment of the population earns significantly less than the median household income.
Which government policy would be most effective at specifically reducing relative poverty without necessarily addressing absolute poverty?

The table below shows the distribution of national income among households in a country before and after a change in government policy.

Percentage of National Income (%)

Explain why income is categorized as a flow concept while wealth is categorized as a stock concept in the context of economic measurement.

Analyze how the poverty trap is created when the withdrawal of means-tested benefits interacts with progressive income taxes, and explain why this results in a high marginal effective tax rate for low-income workers.

Analyse why the effectiveness of a national minimum wage in reducing income inequality depends significantly on the price elasticity of demand for low-skilled labour.

(a) Distinguish between income and wealth, and explain why one is defined as a 'flow' while the other is defined as a 'stock'.
(b) Analyse how the use of progressive income taxes and transfer payments can be used by a government to achieve a more equitable distribution of income.
(c) Explain what a Gini coefficient of \( 0.55 \) indicates about income inequality in a country compared to a value of \( 0.25 \).

(a) Explain how the poverty trap can act as a disincentive for low-income individuals to increase their work effort or seek higher-paying employment.
(b) Analyse why a government might prefer using progressive income taxes and inheritance taxes as methods to redistribute wealth and income rather than relying solely on indirect taxes.
(c) Evaluate the view that the state provision of essential services, such as healthcare and education, is a more effective policy for achieving equity than the use of direct transfer payments.