Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Course Course Number University or College Professor’s Name Student Name:________________________ Section: ______________________________ $Distribution Exercise #3 Answers ( points) Please limit your answers to the spaces provided. If necessary, write on the back of the page. Do not attach printout or additional pages. All questions pertain to the $Distribution module in the SimEcon® software package. Make sure that you have read the “$Distribution Manual” and “SimEcon® Operation Instructions.” These materials may be found at the Class Web site prior to beginning the exercise. For many of the exercise’s questions, it will be necessary to refer to those instructions. For many of the exercise’s questions, it will be necessary to refer to your text. Open the $Distribution module. You will see the “Initial Income Distribution.” Print out or copy this table for future reference. Look at the quintile distribution. What percent of income is earned by the bottom 40% of the population? 14.2%. What percent of income is earned by the top 40% of the population? 70.2%. What is the total GDP of the society? $10,000. What is the Gini coefficient? The Gini coefficient is 0.598 Click “Continue.” You will arrive at the table entitled, “How Do You Want to Change the Distribution?” Select the button entitled, “Economic Policy.” The program will respond automatically. Select “Change Income Tax Rates.” You will arrive at a table of the tax rate schedule, which is shown below. Before proceeding, answer the questions in the next paragraph. Current Tax Rate Schedule Bottom 20% 0.12 2nd 20% 0.15 3rd 20% 0.20 4th 20% 0.25 Top 20% 0.35 What is meant by a progressive tax system? A progressive tax system is one in which those with high incomes pay a greater proportion of their income than those with lower incomes. What is meant by a regressive tax system? A regressive tax system occurs where those with lower incomes pay a greater portion of their income than those with higher incomes. What is meant by a proportional tax system? A proportional tax system occurs where everyone pays the same proportion of their income. Is the current tax rate schedule a progressive, regressive or proportional tax system? This is a progressive tax system. Suppose the current administration gets its political support from those in the upper income brackets. Considering the last paragraph, would the administration want a progressive, regressive or proportional tax system? The administration would want a regressive tax system. Course $Distribution Exercise #3 Answers Page 2 Now, enter the following tax rate schedule. Current Tax Rate Schedule Bottom 20% 0.35 2nd 20% 0.25 3rd 20% 0.20 4th 20% 0.12 Top 0.08 Is this a progressive, regressive or proportional tax system? This is a regressive tax system. Click “Results.” What percent of income is earned by the bottom 40% of the population? 11.8%. What percent of income is earned by the top 40% of the population? 73.7%. What is the total GDP of the society? $9,334. What is the Gini coefficient? The Gini coefficient is 0.619. Has the distribution of income become more equal or more unequal? The distribution of income has become more unequal. Has the total income of this society increased or decreased? The total income of society has decreased. On a positive economic basis, i.e. considering only the total benefit to society, does this tax system represent sound economic policy? No (Yes, No). Why or why not? This policy is not sound because it has caused a net decrease in total GDP. Do the upper classes benefit more from this tax system than do the poor? Yes (Yes, No). Is the total income received by the top 20% higher or lower? Lower. How much has that income changed—show your calculations. Before the top 20% received 47.4% of $10 trillion. After the change they receive 50.5% of $9.334 trillion. Their income has dropped from $4.74 trillion to $4.71 trillion. Click the “Back” button twice. When you see “How Do You Want to Change the Distribution?” select “ Economic Disturbance.” Suppose that we could compare this country to another nation which is identical in every way except for the initial distribution of wealth. Suppose this other nation had a more unequal distribution of wealth. First, what is the difference between wealth and income? Wealth is the net value of everything that a person possesses at a given point in time. Income represents the flow of revenues that a person enjoys over a period of time. Select “Change Wealth Distribution.” Fill in the amounts below for the current wealth distribution in this nation. Current Wealth Distribution Bottom 20% -0.05 2nd 20% 0.25 3rd 20% 4.50 4th 20% 11.90 Top 20% 83.4 The figure for the bottom 20% is negative. What does this mean? This means that the typical person in the bottom 20% owes more than he or she owns (more debts than assets). The typical net worth of this group is negative. Fill in the following new amounts for a revised wealth distribution on the next page and click “Results.” Course $Distribution Exercise #3 Answers Page 3 New Wealth Distribution Bottom 20% -0.05 2nd 20% -0.05 3rd 20% -0.05 4th 20% 0.00 Top 20% 100.15 Look at the quintile distribution. What percent of income is earned by the bottom 40% of the population? 14.1%. What percent of income is earned by the top 40% of the population? 71.6%. What is the total GDP of the society? $10,000. Click See Graph and look at the Gini Coefficient. What is the Gini coefficient? The Gini coefficient is 0.612. Compared to the initial distribution that this module started with, has the distribution of income become more equal or more unequal? The distribution of income has become more unequal. Has the total GDP of society changed, compared with the initial situation? No (Yes, No). Thus, from a positive economic standpoint, i.e. concerned only with facts and only with maximizing total net benefit, would an economist support, oppose or be indifferent to this policy (Give reasons for your answer)? The economist would be indifferent to this policy because it results in no change in total income. However, what might be some of the normative (value judgment) arguments against this policy? A normative analysis would include consideration of equity. If there were reason to think that the greater degree of inequality was caused by unfair means, that would be a reason to change it. One theory of justice (Rawls) requires everyone to ask if this degree of inequality would be acceptable to them if they did not know whether they would be among the wealthy or the poor. If a distribution would not be acceptable, that distribution would be considered unjust. Click the “Back” button twice. You will see “How Do You Want to Change the Distribution.” At this point, lets take a different approach. Suppose that the government of this nation had great concern for the plight of the poor. Select “Economic Policy.” Select “Change Welfare Budget.” Given this government’s new intentions, how should it change the size of the welfare budget? The government should increase the welfare budget. Which group of people do welfare programs primarily benefit? They primarily benefit those in the bottom portion of the income distribution. Enter a value of 8% and click “Results.” You will see the table entitled, “Results of Setting the Welfare Budget.” Click “Quintile Results.” What percent of income is earned by the bottom 40% of the population? 20.90%. What percent of income is earned by the top 40% of the population? 63.05%. What is the total GDP of the society? $9,735. What has happened to the Gini coefficient? It is now 0.55. Compared to the initial distribution that this module started with, has the distribution of income become more equal or more unequal? The distribution of income has become more equal. Has the total GDP of society increased or decreased, compared with the initial situation? Total Course $Distribution Exercise #3 Answers Page 4 GDP has decreased. Why would this policy decrease GDP? This policy may decrease real GDP because it reduces the incentives to produce. A poor person who now receives more welfare benefits is less desperate for a job and may work less (produce less). Taxpayers who are paying for these benefits may reduce their efforts also since they are being “forced” to share their production with welfare recipients. Thus, from a positive economic standpoint, i.e. concerned only with maximizing total net benefit, would an economist support, oppose or be indifferent to this policy? (give reasons for your answer)? The economist might be opposed to this policy because of this cost. However, what might be a normative (value judgment) argument in favor of this policy? Some might argue that this policy is more humane and “fair” and “just.” Click “See Graph” and draw the resulting graph on the next page. Indicate the old Lorenz Curve, the new Lorenz Curve, the 45-degree line, and label all axes. Percent of Families 0 20 Percent of Income 40 60 80 100 Dashed Line = 45-Degree Line; Thick Line = New Lorenz Curve; Thin Line = Old Lorenz Curve What is the Lorenz Curve and what is it purpose? The Lorenz Curve is a plot of the quintile distribution. The purpose of the Lorenz Curve is to graphically depict the equality or inequality of the distribution of income in a given economy. What does the 45-degree line depict? The 45-degree line indicates an exactly equal distribution of income, where everyone gets an equal share of the income pie. If the Lorenz Curve is stretched out further away from the 45-degree line, does that indicate a more equal or more unequal distribution of income? That indicates a more unequal distribution of income. If the Lorenz Curve is located closer to the 45-degree line, does that indicate a more equal or a more unequal Course $Distribution Exercise #3 Answers Page 5 distribution of income? That indicates a more equal distribution of income. Look at the new Lorenz Curve that you drew above. Considering the first three quintiles, has the distribution of income become more equal? Yes (Yes, No). Click the “Back” button three times. You will arrive at the table entitled, “How Do You Want to Change the Distribution.” Select “Economic Disturbance.” Suppose that this government wanted to affect the unemployment rate. Given its concern for the poor would it seek to increase, leave unchanged or decrease the unemployment rate? (Give reasons for your answer.) This government would want to decrease the unemployment rate because joblessness primarily affects the lower and middle-income groups. Lowering the unemployment rate would increase their earnings and would result in a larger proportion of income going to them even though the absolute incomes of those in the upper income group could even rise as profits, rents, etc. increase. Select “Change Unemployment Rate” and enter a rate of 2%. Click “Results.” What percent of income is earned by the bottom 40% of the population? 15.70%. What percent of income is earned by the top 40% of the population? 68.90%. What is the total GDP of the society? $10,371. Has the total income of the top 40% increased, decreased, or remained the same? Total income for this group has gone up. What was the income of this group before and after the change? Before the change the top 40% received 70.2% of $10 trillion, or $7.02 trillion. After the change this group received 68.9% or $10.371 trillion, or $7.146 trillion, an increase of $126 billion. What is the Gini coefficient? It is 0.59. Compared to the initial distribution that this module started with, has the distribution of income become more equal or more unequal? The distribution of income has become slightly more equal. Now, compare these results with the very last example where the welfare budget was changed. Are the results of changing the unemployment rate stronger or weaker compared to changing the welfare budget? The results of changing the unemployment rate are weaker. However, has the total GDP of society increased or decreased as a result of reducing unemployment? Total GDP has increased. Why has this occurred? Total GDP has increased because more resources, including workers, are being used. From a positive economic standpoint, i.e. without concern for fairness, would an economist support, oppose or be indifferent to this policy (Give reasons for your answer)? The economist would support this policy because it results in an increase in total income. To some extent, does reducing the unemployment rate represent the best of both worlds in terms of redistributing income and increasing total GDP? Yes (Yes, No).