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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 Course $Distribution Exercise #2 Page 2 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? _________________________ _______ ____ ______________________________________________________________________________ _______________________________. 2 Course $Distribution Exercise #2 Page 3 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? ________________________________________ __ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________ 3 Course $Distribution Exercise #2Answers Page 4 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) 4 Course $Distribution Exercise #2 Answers Page 5 Click on See Graph and reproduce the graph below. Does this graph indicate greater inequality or less inequality over most income ranges. ________________________________________ _ _ ______________________________________ 5