If the government increases tax rates to the richest households in the distribution, then the Lorenz curve should shift ____________ and the Gini coefficient should ______________.Selected answer will be automatically saved. For keyboard navigation, press up/down arrow keys to select an answer.atoward the diagonal; decreasebaway from the diagonal; increasectoward the diagonal; increasedaway from the diagonal; decreaseeto a straight line; increase
Question
If the government increases tax rates to the richest households in the distribution, then the Lorenz curve should shift ____________ and the Gini coefficient should ______________.Selected answer will be automatically saved. For keyboard navigation, press up/down arrow keys to select an answer.atoward the diagonal; decreasebaway from the diagonal; increasectoward the diagonal; increasedaway from the diagonal; decreaseeto a straight line; increase
Solution
The answer is: toward the diagonal; decrease.
Here's why:
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The Lorenz curve is a graphical representation of the distribution of income or distribution of wealth. It shows the proportion of the total income or wealth assumed by the bottom x% of the people. If the government increases tax rates for the richest households, it means that the wealth of the richest households will decrease and the wealth of the poorest households will increase (assuming the additional tax revenue is redistributed to the poorer households). This would make the distribution of wealth more equal.
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As a result, the Lorenz curve would shift toward the diagonal. The diagonal line represents perfect equality (where everyone has the same income or wealth). So, if the distribution of wealth becomes more equal, the Lorenz curve moves closer to this line.
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The Gini coefficient is a measure of inequality. A Gini coefficient of 0 represents perfect equality, while a Gini coefficient of 1 represents perfect inequality. If the distribution of wealth becomes more equal (as it would if the government increases tax rates for the richest households), the Gini coefficient should decrease.
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