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AP Microeconomics
Unit 6: Market Failure and the Role of Government
6.5 Income and Wealth Inequality
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What statistical measure is often used to measure income inequality?
Gini coefficient
Wealth inequality refers to the uneven distribution of assets like real estate, stocks, and
savings
The Gini coefficient for wealth inequality ranges from
0
to 1, where 0 indicates perfect equality.
Match the inequality type with the assets considered:
Income Inequality ↔️ Wages, salaries, earnings
Wealth Inequality ↔️ Real estate, stocks, savings
The Gini coefficient ranges from 0, which indicates perfect
equality
What is the Gini coefficient calculated by dividing?
Area between Lorenz curve and equality line by total area under equality line
A Gini coefficient of
0.6
indicates high income inequality.
The Gini coefficient is calculated using the area between the Lorenz curve and the line of perfect
equality
Steps to measure wealth inequality using the Lorenz curve:
1️⃣ Plot cumulative percentage of population against cumulative percentage of wealth
2️⃣ Draw the Lorenz curve below the line of equality
3️⃣ Calculate the area between the Lorenz curve and the line of equality
4️⃣ Compute the Gini coefficient
Match the Gini coefficient value with its interpretation for wealth inequality:
0 ↔️ Perfect equality
0.4 - 0.5 ↔️ Moderate inequality
1 ↔️ Complete inequality
What is one factor that contributes to both income and wealth inequality?
Education
Specialized skills are in demand, commanding higher
wages
Inherited wealth is a significant factor contributing to
wealth inequality
.
What type of biases can limit income and wealth accumulation for certain groups?
Discrimination
Technological change, such as automation, can displace lower-skilled
jobs
What does the Gini coefficient measure?
Income inequality
The Gini coefficient ranges from 0 to
1
.
The Gini coefficient is calculated by dividing the area between the Lorenz curve and the line of perfect
equality
What is the formula for the Gini coefficient in terms of the Lorenz curve?
G
=
G =
G
=
1
−
2
∫
0
1
L
(
x
)
d
x
1 - 2 \int_{0}^{1} L(x) dx
1
−
2
∫
0
1
L
(
x
)
d
x
Match the Gini coefficient value with its interpretation:
0 ↔️ Perfect equality
0.2-0.3 ↔️ Low inequality
0.4-0.5 ↔️ Moderate inequality
0.6-0.7 ↔️ High inequality
1 ↔️ Complete inequality
The Lorenz curve lies above the line of perfect equality.
False
The Gini coefficient for wealth inequality is calculated using the area between the Lorenz curve and the line of perfect
equality
What are key factors contributing to income and wealth inequality?
Education, skills, inheritance
Bias against certain groups can contribute to wage
inequality
.
Income inequality can reduce aggregate
demand
What is a negative implication of income inequality for economic growth?
Reduced aggregate demand
Match the social implication with its effect of income inequality:
Health disparities ↔️ Lower health outcomes
Educational inequality ↔️ Unequal access to quality education
Social mobility ↔️ Reduced upward opportunities
Crime rates ↔️ Higher crime associated with poverty
Social cohesion ↔️ Diminished trust and cooperation
Progressive taxation involves higher tax rates for higher
income brackets
.
What is one potential weakness of minimum wage laws?
Reduced employment
Income inequality is often measured using the Gini
coefficient
What assets are considered in wealth inequality?
Real estate, stocks, savings
The Gini coefficient is a statistical measure of income inequality within a
population
What is the Gini coefficient calculated by dividing?
Area between Lorenz curve and equality line by total area under equality line
Match the Gini coefficient value with its interpretation:
0 ↔️ Perfect equality
0.2 - 0.3 ↔️ Low inequality
0.4 - 0.5 ↔️ Moderate inequality
0.6 - 0.7 ↔️ High inequality
1 ↔️ Complete inequality
A Gini coefficient of 0.2 indicates moderate income inequality.
False
Steps to measure wealth inequality using the Lorenz curve:
1️⃣ Plot cumulative percentage of population against cumulative percentage of wealth
2️⃣ Draw the Lorenz curve below the line of perfect equality
3️⃣ Calculate the area between the Lorenz curve and the line of perfect equality
4️⃣ Compute the Gini coefficient using the calculated area
What does a Gini coefficient of 1 indicate for wealth inequality?
All wealth owned by one person
Specialized skills increase wages and reduce wealth
inequality
.
What is a positive economic implication of wealth inequality?
Incentivizes productivity
High income and wealth inequality can lead to disparities in health outcomes due to inadequate healthcare
access
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