4.1.7.3 Government policies to alleviate poverty and influence income and wealth distribution Quiz: AQA Economics, Unit 1

The 20 questions

1. Which policy most directly redistributes income from higher earners to lower earners?

   • A reduction in the basic rate of income tax paid by all taxpayers, regardless of the level of their earnings.
   • A flat rate of value added tax applied equally to all goods and services bought by households across the economy.
   • A rise in the price of goods sold by monopolies, which raises their profits and so increases dividends paid to shareholders.
   • A progressive income tax combined with means-tested benefits paid to low-income households.

2. What is a means-tested benefit?

   • A payment whose eligibility and amount depend on the recipient's income, savings or other resources.
   • A payment made to every citizen in the economy, regardless of their income, wealth or employment status.
   • A payment for the use of public goods, such as roads, parks and street lighting, charged in proportion to usage.
   • A subsidy paid to firms that employ workers on the minimum wage, so that labour costs are reduced for employers.

3. Which policy would most directly affect the distribution of wealth rather than income?

   • An increase in the basic rate of income tax, which taxes only the flow of earnings received in each year.
   • A rise in the minimum wage, which affects only the earnings received by low-paid workers in each year.
   • A cut in unemployment benefit, which reduces the income transfers paid to households without jobs in the economy.
   • A progressive tax on inherited estates, which taxes the transfer of accumulated assets between generations.

4. A government introduces a national minimum wage. What is the most likely economic consequence for low-paid workers?

   • Lower earnings for all workers, because firms reduce wages to offset the cost of the minimum wage set by government in the case described.
   • A permanent rise in aggregate supply, because a higher wage floor increases the productivity of every worker in the economy.
   • Higher earnings for those who keep their jobs, but a possible reduction in the number of jobs available if firms cut employment.
   • No change in employment or earnings, because the minimum wage always matches the market-clearing wage in every industry.

5. Which is a likely economic consequence of raising means-tested benefits sharply for the poorest households?

   • A stronger incentive for some households to remain on benefits, since working yields less extra income after withdrawal of support.
   • An immediate fall in the government's budget deficit, because higher benefits reduce the total cost of public spending.
   • A fall in aggregate demand, because households on low incomes always save any extra benefit they receive from the state.
   • A rise in the marginal propensity to import, because benefit recipients buy only goods made in foreign countries at the time in question.

6. Which policy is designed to improve the long-term earning capacity of people on low incomes?

   • A cut in the income tax rate for the highest earners, which increases the flow of investment into skilled occupations.
   • A reduction in the rate of value added tax on goods that are bought mainly by high-income households.
   • An increase in the supply of unskilled jobs in the economy, which keeps unemployment low for those without qualifications.
   • Investment in education and training, such as apprenticeships, which raises skills and future productivity.

7. What is a likely cost of a universal benefit paid to every household, regardless of income?

   • It always lowers the Gini coefficient, because payments are made in equal amounts to every household in the economy.
   • It creates a poverty trap for high-income households, since they lose the benefit as soon as their incomes begin to rise.
   • It is cheap, because universal benefits are funded entirely by the private sector and so cost the government nothing at all.
   • It is expensive, because payments go to high-income households who do not need them, so the cost to the Exchequer is high.

8. Which evaluation point best challenges reliance on redistribution through taxes and benefits?

   • Taxes and benefits can reduce incentives to work and invest, so the trade-off between equity and efficiency must be weighed.
   • Taxes are paid only by the wealthy, so any redistribution policy has no effect on the incomes of the middle class.
   • Redistribution always raises economic growth, because the government spends the revenue on productive investment without any loss.
   • Redistribution has no effect on work incentives, because workers respond only to their pay and not to the taxes they face.

9. Which policy directly addresses wealth inequality, rather than only income inequality?

   • A tax on capital gains and wealth held in large fortunes, which reduces the accumulation of assets by the richest households.
   • A rise in the rate of value added tax, which applies equally to all households regardless of their level of wealth.
   • An increase in income support for low-paid workers, which raises the flow of earnings but not the stock of assets.
   • A subsidy on the cost of household energy, which is paid as a fixed amount to every household in the economy in the case described.

10. Which of these is an example of a supply-side policy to reduce poverty?

    • A cut in the tax rate on the lowest earners, which increases their disposable income without changing their productivity.
    • Direct payments made to households, which raise consumption spending and so create short-run increases in output in the case described.
    • A rise in government spending on benefits, which increases aggregate demand in the short run and so raises incomes.
    • Measures that increase the productive capacity of low-income workers, such as training schemes that improve their employability.

11. A government raises the personal allowance, so that people earning below a certain amount pay no income tax. Which effect is most likely?

    • The marginal propensity to save falls to zero, because low earners spend all of their extra income immediately on goods.
    • Disposable income of low earners rises, which reduces the number of households in relative poverty among those earners.
    • Absolute poverty rises, because the government has less revenue to spend on the health services used by poor households.
    • The Gini coefficient rises, because the richest households now pay a smaller share of total tax revenue in the economy.

12. Which measure is a form of direct provision of goods to the poor?

    • A cash transfer paid to every household, which the recipients can spend on any goods and services they choose.
    • A reduction in the stamp duty on property purchases, which lowers the cost of buying homes for all buyers.
    • A tax credit paid through the wage packet, which raises the disposable income of workers in the economy.
    • Free or subsidised school meals and healthcare, which provide services directly rather than as cash payments.

13. Which is a likely benefit of a progressive tax system for reducing income inequality?

    • Tax revenue falls as income rises, so the government collects less from the highest earners and inequality therefore grows.
    • Lower earners pay a higher proportion of their income in tax, so post-tax incomes become more unequal across the economy.
    • Those with higher incomes pay a larger proportion of their income in tax, so post-tax incomes are more evenly distributed.
    • Every household pays the same amount of tax, so the distribution of disposable income is unchanged by the tax system.

14. A policy of raising the basic rate of tax and spending the revenue on child benefit is most likely to:

    • Lower the marginal propensity to consume of every household, since all households receive the same amount of child benefit.
    • Reduce the government's budget deficit, because child benefit is paid for entirely by the private sector and carries no fiscal cost.
    • Increase the incomes of all households equally, so the Lorenz curve is unchanged by the policy in the economy.
    • Redistribute income towards households with children, but may reduce work incentives for some higher-rate taxpayers.

15. Which is an economic consequence of a policy that transfers income to the poor through a large increase in tax rates on the rich?

    • A fall in the price level, because redistribution always reduces the total amount of money in circulation in the economy.
    • Higher aggregate supply in the long run, because high earners are encouraged to invest more when tax rates increase.
    • Possible reductions in labour supply and investment by high earners, which can slow the growth of the economy.
    • A rise in the number of firms, since high tax rates reduce the cost of starting new businesses in the economy.

16. Why might a government prefer in-kind benefits, such as housing support, to cash transfers?

    • It is always cheaper to administer than cash, because in-kind benefits require no assessment of eligibility or need in the case described.
    • It raises the real value of the benefit for the recipient, because the government sets the price of the goods at zero.
    • It can ensure that the money is spent on a specific need, such as housing, which may match the policy objective more closely.
    • It removes the need for any means test, because all recipients receive the same in-kind support regardless of income.

17. Which evaluation point best explains why the effectiveness of anti-poverty policy is contested?

    • Anti-poverty policy has been shown by all economists to reduce poverty in every country, so no further debate remains.
    • Different political and moral perspectives place different weight on equity, efficiency and personal responsibility, so judgements vary.
    • Anti-poverty policy affects only absolute poverty and never affects relative poverty, so the two sides of debate do not conflict.
    • The effects of policy are fully measurable in advance, so disagreement arises only from differences in government budgets.

18. A tax credit is paid to low-income workers only when they are in work. What is the main aim of this design?

    • To reduce the government's obligation to provide public housing, since working households no longer need council homes.
    • To lower the national minimum wage, because the tax credit replaces the wage floor entirely for all low-paid workers.
    • To increase the financial reward from working, so that taking a job leaves households better off than remaining on benefits.
    • To make the tax system more regressive, so that the poorest households contribute more to total tax revenue overall in the case described.

19. Which policy would most directly reduce the poverty trap?

    • Lowering the rate at which benefits are withdrawn as earnings rise, so that extra work increases disposable income by more.
    • Increasing the basic rate of value added tax, so that low-income households receive a larger share of the tax revenue raised.
    • Abolishing all benefits for working households, so that the state no longer redistributes income to any group in the economy.
    • Raising the rate at which benefits are withdrawn as earnings rise, so that households have a stronger incentive to save.

20. A government introduces a means-tested housing benefit. Which evaluation point is most relevant?

    • The policy has no effect on housing markets, because subsidies never influence the prices that landlords charge in any market.
    • The policy may raise the living standards of tenants on low incomes, but landlords may capture some of the subsidy through higher rents.
    • The policy raises the number of council homes built, because the benefit is paid only to households building their own homes.
    • The policy always lowers rents for all tenants, because the state pays the full cost of housing for every household in the economy.

Related quizzes

• Economic methodology Quiz · 4.1.1.1 · 20 questions
• The nature and purpose of economic activity Quiz · 4.1.1.2 · 20 questions
• Economic resources Quiz · 4.1.1.3 · 20 questions
• Scarcity, choice and the allocation of resources Quiz · 4.1.1.4 · 20 questions
• Production possibility diagrams Quiz · 4.1.1.5 · 20 questions
• Consumer behaviour Quiz · 4.1.2.1 · 20 questions
• Imperfect information Quiz · 4.1.2.2 · 20 questions
• Aspects of behavioural economic theory Quiz · 4.1.2.3 · 20 questions
• Behavioural economics and economic policy Quiz · 4.1.2.4 · 20 questions
• The determinants of the demand for goods and services Quiz · 4.1.3.1 · 20 questions