A government redistribution of income program is proposed with the aim of making the income distribution the same as the 45° line in a Lorenz curve diagram. What implications does the idea of the "big tradeoff" have for the program?
What will be an ideal response?
If the distribution of income was the same as the 45° line in a Lorenz curve diagram, then there would be no income differences across all households; everyone would have the same income. While this proposition might be appealing on an emotional level, the big tradeoff points out a significant drawback with this program and this outcome. The problem with the program arises because to achieve the desired result, the government would need to remove income from people who otherwise would be in the upper end of the income distribution and give the income to people who otherwise would be near the bottom end of the income distribution. This redistribution would drastically reduce the incentives of successful people to create new products, technologies and jobs. It would tell people that education, skill and training, and hard work will not be rewarded. People would rationally assume that there is no relationship between effort and outcome and therefore work effort would decrease sharply.
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If a tariff on bikes causes domestic bike prices to rise by 20% and domestic value added in the domestic bike industry to rise by 30%, then
A) the nominal rate of protection of bikes is 20%. B) the effective rate of protection of bikes is 30%. C) the effective rate of protection is higher than the nominal rate. D) All of the above.
Refer to Figure 3.2. At any consumption bundle with the quantity of good X exceeding the quantity of good Y (that is, a bundle located below the 45 degree line, like point A), Alvin's marginal rate of substitution of good X for good Y is
A) diminishing. B) positive. C) constant and positive. D) zero.
As the outstanding debt of a nation becomes very large relative to the size of the economy,
a. the borrowing cost of the government will decline. b. lenders will have no choice but to hold the outstanding bonds and to buy the new ones as they are offered. c. a country like the United States will have no choice but to default on the payments to bond holders. d. if the country has a central bank, it will almost certainly resort to money creation to service the debt rather than directly default.
Macroeconomics deals with ________ while microeconomics deals with ________.
A. choices of rich people; choices of poor people B. choices important to people; choices not important to people C. choices that involve money; choices that does not involve money D. economywide choices; choices of individuals