Economics of inequality and poverty practice questions.

Which statement best distinguishes equality from equity in the distribution of income?

• Equality refers to fairness, while equity means everyone receives the same income
• Equality and equity both mean that income is distributed according to need
• Equality means everyone gets the same, while equity means a fair distribution
• Equity is a positive concept, while equality is a normative concept

Answer: Equality means everyone gets the same, while equity means a fair distribution

Equality is about identical outcomes (everyone gets the same), whereas equity is a normative judgement about fairness — a fair distribution need not be an equal one.

A tax system in which the average tax rate rises as income rises is best described as

• progressive
• proportional
• regressive
• indirect

Answer: progressive

A progressive tax takes a larger proportion of income as income rises, i.e. the average tax rate increases with income; this is the key redistribution tool in most tax systems.

In Country Y the first $20,000 of income is untaxed, the next $20,000 is taxed at 20%, and any income above $40,000 is taxed at 40%. Calculate the average tax rate for a person earning $60,000.

• 24%
• 20%
• 30%
• 40%

Answer: 20%

Tax paid = 0 + (20% × 20,000) + (40% × 20,000) = 4,000 + 8,000 = $12,000, so the average tax rate = 12,000 ÷ 60,000 = 20%. The 40% figure is the marginal, not the average, rate.

Which of the following government measures redistributes income most directly to low-income households?

• Raising the standard rate of a value added tax (VAT)
• Cutting the top marginal rate of income tax
• Granting subsidies to exporting firms
• Means-tested transfers such as child benefits

Answer: Means-tested transfers such as child benefits

Means-tested transfers move purchasing power directly to households below an income threshold; VAT rises are regressive and top-rate cuts benefit high earners.

A person is considered to be in relative poverty when their income is

• below the World Bank international poverty line
• below a set percentage (e.g. 50%) of the country's median income
• insufficient to purchase the basic necessities for survival
• lower than the income of the poorest quintile in a neighbouring country

Answer: below a set percentage (e.g. 50%) of the country's median income

Relative poverty compares a household's income with typical living standards in its own society, usually defined as income below around 50% of the national median.

Which of the following is NOT one of the three dimensions of the Multidimensional Poverty Index (MPI)?

• Health
• Education
• Income
• Standard of living

Answer: Income

The MPI measures deprivation in health, education and standard of living; it deliberately captures non-income aspects of poverty, so income itself is not a dimension.