4.1.7.2 The problem of poverty Quiz: AQA Economics, Unit 1

The 20 questions

1. Absolute poverty is best defined as:

   • Lacking the income needed to obtain the minimum goods and services required for survival, such as food, shelter and clothing.
   • Having a lower income than the richest 10 per cent of households in the economy, measured over a single year at the time in question.
   • Having an income below 60 per cent of the median household income in the same society at the same point in time.
   • Having less wealth than the average household but earning a rising real income over a sustained period of time.

2. Relative poverty is best described as:

   • The share of national wealth held by the poorest 10 per cent of households, expressed as a value on a Lorenz curve.
   • A household income that has fallen in real terms over the previous five years, regardless of the level of that income.
   • An income insufficient to meet a fixed basket of basic needs, valued at constant prices across all countries of the world.
   • An income below a set proportion, such as 60 per cent, of the median income in the same society at the same time.

3. Which of the following is a cause of poverty?

   • A fall in the rate of inflation, which raises the real value of benefit payments made to all households in the economy.
   • Long-term unemployment, which leads to loss of earnings and skills that make re-entry to work more difficult.
   • A rise in the number of households with two earners, which increases household income and reduces the risk of poverty.
   • An increase in the share of national income paid to workers, which reduces the wage gap between skilled and unskilled labour.

4. Which is a likely effect of persistent poverty on human capital?

   • A rise in the marginal propensity to save, which increases the rate of long-run economic growth in the economy over time.
   • Greater labour mobility, because low-income households move more freely between regions in search of better job opportunities.
   • Higher lifetime earnings, as poorer households invest more heavily in education and training than wealthier households do.
   • Lower educational attainment and poorer health, which reduce future productivity and the earning potential of the individuals affected.

5. A society's median household income is £30,000. Using a threshold of 60 per cent of the median, which household is in relative poverty?

   • A household with an income of £20,000, which is above the threshold of 60 per cent of the median income of £30,000.
   • A household with an income of £18,000, which equals the threshold and so is not counted as being in relative poverty.
   • A household with an income of £16,000, which is below the threshold of £18,000.
   • A household with an income of £32,000, which is above the median and so can never be counted as being in relative poverty.

6. Which best describes a poverty trap?

   • A situation where the government sets a minimum wage above the market-clearing wage, creating unemployment among low-skilled workers.
   • A situation where withdrawal of means-tested benefits as earnings rise means extra work yields little or no additional disposable income.
   • A situation where prices rise faster than wages, lowering the real value of income for all households across the economy.
   • A situation where households save a higher share of income, reducing their consumption and raising long-run economic growth rates.

7. Median income in an economy rises by 10 per cent, while the incomes of the poorest households stay constant. Which outcome is most likely?

   • Absolute poverty rises, because median income is a measure of absolute income across all households in the economy in the case described.
   • Neither relative nor absolute poverty can change, because both measures are calculated using the same fixed basket of goods.
   • Relative poverty falls, because the median income is higher than the income of the poorest households in the economy.
   • Relative poverty rises, because the poverty threshold rises with median income while the poorest households' incomes do not change.

8. A household's nominal income rises, but its real income falls. What is the most likely cause?

   • The household's income is taxed at a higher marginal rate, so its gross nominal income falls in every pay period.
   • Income is measured before tax, so real income always falls as nominal income increases over time in any economy in the case described.
   • The household's wealth falls, so its income from assets is reduced in nominal terms over the same period of time.
   • The general price level rises faster than nominal income, so the household can buy fewer goods and services than before.

9. Which is an effect of poverty on the economy as a whole?

   • A rise in the savings ratio, as poor households save a larger share of their meagre incomes than wealthier households do.
   • Higher aggregate supply, because low-income workers accept lower wages, which reduces unit costs for firms in the economy.
   • Lower government spending on benefits, since poverty reduces demand for public services provided by the state.
   • Reduced productivity and lower tax revenues, as people in poverty contribute less to output and pay less tax.

10. Which is a structural cause of poverty?

    • A short period of cyclical unemployment that is expected to end once the economy recovers from a recession.
    • Changes in the demand for skills, such as technological change, which leave workers with obsolete skills unable to find jobs.
    • Seasonal fluctuations in demand for tourism services in coastal towns during the winter months of each year.
    • A temporary rise in the price of imported food, which fully reverses within a single quarter of the year during the period under review.

11. Which is the best evaluation of using a relative poverty measure?

    • It always gives the same result as an absolute measure, so the two measures can be used interchangeably in all analysis.
    • It is unaffected by changes in income distribution, because it is tied only to the general level of prices in the economy.
    • It captures exclusion from the norms of society, but a rise in median income can raise measured poverty even when no one is worse off.
    • It shows exactly how many people lack food and shelter, since it is based on a fixed basket of goods and services in the case described.

12. A government raises benefits for the poorest by £10 a week, but the poverty trap remains. Why?

    • Benefit increases always reduce national income, which leads to higher unemployment among all groups in the economy.
    • Households on benefits have a marginal propensity to save of one, so their spending does not rise in response to the increase.
    • Means-tested benefits are withdrawn as earnings rise, so additional work yields little extra disposable income for the household.
    • Benefits are paid only in kind, so households cannot spend the extra money on the goods and services they need over the period concerned.

13. A family's gross wage rises by £2,000 a year, its benefits fall by £1,500 and its tax rises by £300. What is the change in its disposable income?

    • An increase of £200 a year.
    • A decrease of £500 a year, because the rise in tax is larger than the rise in the gross wage in this case.
    • An increase of £3,800 a year, because the wage rise is added to the fall in benefits and the tax rise.
    • A decrease of £1,500 a year, because the fall in benefits is the only change that affects disposable income.

14. Which effect of poverty is most likely to create a long-term drag on economic growth?

    • Households in poverty saving more, which permanently reduces aggregate demand and so lowers the price level in the economy.
    • Lower inflation caused by weak consumer demand, which always raises the real income of other groups in the economy in the case described.
    • Children from low-income homes achieving lower qualifications, which reduces the future supply of skilled labour in the economy.
    • Greater mobility of labour between regions, which removes skills shortages in high-productivity areas of the economy.

15. Which explains why absolute poverty can fall while relative poverty rises?

    • The median income falls, but the incomes of the poorest households rise, so both absolute and relative poverty must fall.
    • Real incomes fall for everyone, but incomes at the bottom fall more slowly than the median, so the relative threshold falls.
    • Real incomes rise for everyone, but incomes at the bottom grow more slowly than the median, so the relative threshold rises faster.
    • Nominal incomes rise for everyone, so absolute poverty is measured against the same fixed basket of goods in each year.

16. Which is an effect of relative poverty on social outcomes?

    • Higher levels of savings among excluded groups, which reduces their reliance on credit and improves their financial security.
    • An increase in the proportion of income spent on luxury goods, as excluded groups seek status and recognition from others.
    • A fall in the number of people who are unemployed, because social exclusion encourages households to search more widely for jobs.
    • Social exclusion, such as being unable to afford activities and goods that are normal in the society a household lives in.

17. Which statement about a poverty line is correct?

    • It can be a fixed absolute threshold, such as the cost of a basic basket, or a relative threshold such as 60 per cent of median income.
    • It is measured only in terms of wealth, not income, in all official statistics published by governments across the world.
    • It is always set at 50 per cent of mean income, regardless of how income is distributed across households in the economy.
    • It is identical in every country, because it is set at a single value by an international body for all economies at the time in question.

18. Which group would most likely be counted as being in absolute poverty?

    • A household whose wealth is lower than the national average but which earns a high income from employment each year.
    • A household that cannot afford enough food and clean water to meet its basic survival needs each day.
    • A household whose income is slightly below the national median but which can afford food, clothing and adequate shelter.
    • A household with income above the median but which has no savings, property or other assets to draw on in emergencies.

19. Which of the following best explains intergenerational poverty?

    • Poverty is passed on through genetic traits that determine the level of productivity achieved by individuals in adulthood.
    • Children inherit debts from their parents, which the state always cancels at birth, so the debts never affect later incomes.
    • Children from low-income families have fewer chances to gain education and skills, so they are more likely to stay poor as adults.
    • Poor households tend to earn higher lifetime incomes, because they spend less on consumption than wealthier households do.

20. Official UK low-income measures are based on which income concept?

    • The total value of household wealth, including property and savings, adjusted only for changes in the general price level.
    • The income of the single highest-earning individual in each household, used as a measure of the household's living standard.
    • Household income after taxes and benefits, adjusted for household size so that households of different sizes can be compared.
    • Gross household income before any taxes or benefits, without any adjustment for the number of people in the household.

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