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Course
Course Number
University or College
Professor’s Name
$Distribution Exercise #2 (
Student Name:________________________
Section: ______________________________
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 $Distribution module. You will see the “Initial Income Distribution. The bottom
40% of the population in terms of income earns what percent of total national income? _____
The top 40% of the population in terms of income earns what percent of national income? _____
Do these statistics indicate an equal distribution of income? ___ (Yes, No). Why or why not? _
______________________________________________________________________________
______________________________________________________________________________
_______________________________________________________________________. Would
a member of the upper class, assuming that he/she is not altruistic, support the status quo in this
situation? ___ (Yes, No). Would a member of the lower income group who expected to “move
up” in society support the status quo? ___ (Yes, No). Would a member of the lower income
group who did not expect to move up in society support the status quo in this situation? ___
(Yes, No).
What is meant by a progressive tax system? _______
____________________________
______________________________________________________________________. What is
meant by a regressive tax system? _______________ ______________________________
____________________________________________________________. What is meant by a
proportional tax system? ____ ___________________________________________________
__ ____________________________________________________________________.
Click “Continue.” You will see “How Do You Want to Change the Distribution?” Select the
button entitled “Economic Policy.” The program will automatically respond. Select the button
entitled, “Change Income Tax Rates.” The program will automatically respond. Fill in the table
below for the current tax rate schedule:
Current Tax Rate Schedule
Bottom 20%
0.12
2nd 20%
0.15
3rd 20%
0.20
4th 20%
0.25
Top 20%
0.35
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$Distribution Exercise #2
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Is the current tax rate schedule progressive? ___ (Yes, No). If the above society wanted to
make the distribution more equal, the government should make the tax system more _______ __
(progressive, proportional, regressive). In order to make the tax rate schedule more progressive,
change the current tax rate schedule by entering the following amounts.
Tax Rate Schedule
Bottom 20%
0.00
2nd 20%
0.05
3rd 20%
0.10
4th 20%
0.31
Top 20%
0.50
Click “Results.” The bottom 40% of the population in terms of income earns what percent of
total national income? _____. The top 40% of the population in terms of income earns what
percent of national income? _____. Do these statistics indicate a more equal distribution of
income? ___. (Yes, No). Click “See Graph” and draw the resulting graph below. Indicate the
old Lorenz Curve, the new Lorenz Curve, the 45-degree line, and label all axes.
What is the Lorenz Curve and what is it purpose? _________________________ _______ ____
______________________________________________________________________________
_______________________________.
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$Distribution Exercise #2
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What does the 45-degree line depict? _____________________________________________
___________________________________________________. 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? _____________________________________________. If the Lorenz
Curve is located closer to the 45-degree line, does that indicate a more equal or a more unequal
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, No). Does the Gini coefficient confirm the increase in
equality? ___ (Yes, No) How did it change? _________________________.
Suppose that society wanted to develop an exactly proportional tax rate schedule, regardless of
the impact on the distribution of income. What would the government do? Fill in the
appropriate values for an exactly proportional tax system:
Tax Rate Schedule (Exactly Proportional)
Bottom 20%
2nd 20%
3rd 20%
4th 20%
Top 20%
Click the “Back” button three times. You will arrive at the table entitled, “How Do You Want to
Change the Distribution.” Select “Economic Policy.” Then, select “Change Welfare Budget.”
Suppose that society wanted to make the distribution of income more equal. In that case, the
government would want to _____ ___ (increase, decrease, leave unchanged) the welfare budget
as a percent of GDP. Enter 3.5% and click “Results.” What happened to the proportion of the
families making an earned income of less than $10,000 per year? ____________________
__________. Why would that measure change like that? ___________________________
_________________________________________________________________________
_____ . What happened to the proportion who have spendable income less than $10000? _____
__________. Why would this measure change in that way? ________________ _________
______________________________________________________________________________
_____________
After that, click “Quintile Results.” The bottom 40% of the population in terms of income earns
what percent of total national income? _____. The top 40% of the population in terms of income
earns what percent of national income? _____. Compare these results to the very first quintile
that you developed in this exercise. Do these statistics indicate a more equal distribution of
income? ___. (Yes, No). What happened to the level of GDP? _______________ ___ __
__________. Why did it change this way? ________________________________________ __
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________
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$Distribution Exercise #2Answers
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Click the “Back” button twice. You will arrive at the table entitled, “How Do You Want to
Change the Distribution.” Select “Economic Disturbance.” Select the button entitled “Change
Wealth Distribution.” You will see a table entitled, “Percent Wealth Owned.” What is the
difference between wealth and income? ________________________________________
______________________________________________________________________________
__________________________ . If the government enacted policies to make the distribution
of wealth exactly proportional, how would that impact the distribution of income? __ _ _ _ _
__________________________________________________________________________Why
would if have this effect? _______________________________________________________
______________________________________________________________________________
______________________
Enter an equi-proportional distribution of wealth (20 in each box). Click “Results.” The bottom
40% of the population in terms of income earns what percent of total national income? _____
The top 40% of the population in terms of income earns what percent of national income? _____
Compare these results to the very first quintile that you developed in this exercise. Do these
statistics indicate a more equal distribution of income? ___. (Yes, No). When peasants in Latin
American nations advocate the breaking up of large plantations, what are they essentially arguing
for? ___________________________________.
What effect did this have on total GDP? ________________________________________ _
______________. Is this different from the effect you saw from a change in welfare benefits?
Yes (Yes, No) Explain why or why not. ________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
_______________
Click the “Back” button twice. You will arrive at the table entitled, “How Do You Want to
Change the Distribution.” Select “Economic Disturbance.” Select “Change Unemployment
Rate.” Suppose this society was experiencing inflation and the government moved to reduce
total demand to “fight inflation.” What effect would this have on the unemployment rate? __
__________________. Enter a new unemployment rate of 20% and click “Results.” The
bottom 40% of the population in terms of income earns what percent of total national income?
_____ The top 40% of the population in terms of income earns what percent of national income?
___ __ Compare these results to the very first quintile that you developed in this exercise. Do
these statistics indicate a more equal distribution of income? ___. (Yes, No). If the government
also had a desire to avoid increasing inequality are its objectives consistent with each other
(fighting inflation and avoiding increases in inequality)? ___ (Yes, No)
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$Distribution Exercise #2 Answers
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Click on See Graph and reproduce the graph below. Does this graph indicate greater inequality
or less inequality over most income ranges. ________________________________________ _
_ ______________________________________
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