Chapter 12
Poverty: Old and New Approaches to a Persistent Problem
True/False Questions
1. When an individual's resources are not sufficient to provide a minimum standard of living, they
are considered poor.
ANSWER: T
2. The official poverty line is the cost of housing multiplied by three.
ANSWER: F
3. If a family’s money income is less than its relevant poverty threshold, only the children in the
family are counted as poor.
ANSWER: F
4. Many economists feel that the official measure of poverty overstates the number of poor because
it does not include relevant and important sources of income.
ANSWER: T
5. According to the federal government's official measure, the U.S. poverty rate fell from 17.3
percent in 1965 to 11.1 percent in 1973.
ANSWER: T
6. Since 1973, poverty has generally increased in the United States.
ANSWER: T
7. The official poverty threshold is the annual cost of a nutritionally adequate diet multiplied by
two.
ANSWER: F
8. The government adjusts the poverty threshold each year for changes in the Consumer Price
Index.
ANSWER: T
9. Increasing unemployment, the changing composition of the poverty population, and the effects
of government transfers on work incentives all contribute to the increase in the pre-transfer
poverty rate.
ANSWER: T
10. The poverty rate for the elderly has declined significantly over the past 35 years, falling below
the all-ages poverty rate by 1982.
ANSWER: T
11. Over the past 40 years, there has been a significant reduction in the poverty rate for persons
living in female-headed families.
ANSWER: T
12. Labor market discrimination is a major factor in explaining why poverty is concentrated in some
groups in society.
ANSWER: F
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13. The poverty rates for people living in black and Hispanic households fell both absolutely and
relative to the poverty rate in white, non-Hispanic families in the 1990s.
ANSWER: T
14. Unemployment plays only a minor role in maintaining high poverty rates among
African-Americans.
ANSWER: F
15. There is evidence that earnings differentials between white males and others is less among
individuals with less education.
ANSWER: T
16. Policies aimed at reducing labor market discrimination would significantly reduce poverty in the
United States.
ANSWER: F
17. Government transfers may indirectly decrease the income of the poor by reducing work effort.
ANSWER: T
18. Transfers reduce work effort because they reduce the opportunity cost of leisure.
ANSWER: T
19. In general, the greater the break-even net income relative to the poverty threshold, the greater the
target efficiency of a program.
ANSWER: F
20. The benefit reduction rate is the rate at which a recipient's benefits decline as income increases.
ANSWER: T
21. Food Stamps provide cash payments to the working poor.
ANSWER: F
22. Medicaid is the largest of the public assistance programs.
ANSWER: T
23. Evidence shows that public assistance programs have contributed significantly to the formation
of female-headed households.
ANSWER: F
24. The majority of the poor live in households where at least one parent is working.
ANSWER: T
25. Temporary Assistance for Needy Families (TANF), is the nation's safety net program for
low-income families.
ANSWER: T
26. Workfare has been proposed as a method of increasing the earnings of the working poor.
ANSWER: F
Test Bank  415
27. The working poor have received numerous benefits from the employment and training assistance
programs offered by the government.
ANSWER: F
28. Under a minimum wage program, low-wage workers receive a subsidy for each hour worked.
ANSWER: F
29. Each state is allowed to design and implement its own TANF program, including benefit levels
and criteria for eligibility, however, they must spend at least 75 percent of the amount they were
spending from their own funds on AFDC in 1994.
ANSWER: T
30. TANF households are limited to 5 years of support in a lifetime, but states may impose shorter
lifetime limits.
ANSWER: T
31. TANF recipients are not permitted to engage in work or "work activities," such as job training,
looking for work, or schooling.
ANSWER: F
Multiple-Choice Questions
1. The official poverty threshold:
a. is determined by multiplying the cost of a nutritionally adequate diet by three.
b. is determined by examining a household's money income and in-kind transfers.
c. makes no allowances for changes in prices.
d. is determined by comparing a household's income to median income.
ANSWER: a
2. A household is considered poor if:
a. their income is less than the median income.
b. they receive no in-kind transfers.
c. their income is below the official poverty threshold.
d. their income is less than the average cost of housing multiplied by four.
ANSWER: c
3. In-kind transfers refer to:
a. cash payments made by government that can be used for any purpose.
b. transfer payments made by government that must be used for specific purposes.
c. transfers made by private charities such as the Salvation Army that provide money to poor
households.
d. the large transfers made under the Social Security program to elderly individuals.
ANSWER: b
4. Many economists are not satisfied with the official measure of poverty because:
a. the official measure of poverty does not adjust for price changes.
b. the official measure of poverty does not adjust for family size.
c. the official measure of poverty adjusts for the effect of taxes on income.
d. the official measure of poverty excludes relevant and important sources of income.
ANSWER: d
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5. Which of the following is an example of cash assistance?
a. Food Stamps.
b. Housing Assistance.
c. Supplemental Security Income.
d. Medicaid.
ANSWER: c
6. Including in-kind transfers and other resources not reported in surveys of money income would:
a. increase the official poverty rate.
b. decrease the official poverty rate.
c. have no effect on the official poverty rate.
d. have an ambiguous effect on the official poverty rate.
ANSWER: b
7. When the general price level increases, government:
a. increases the poverty threshold.
b. decreases the poverty threshold.
c. does not change the poverty threshold.
d. increases the earned-income tax credit.
ANSWER: a
8. Which of the following statements is correct?
a. The poverty rate in the United States has fallen since 1959.
b. Large increases in government cash transfers account for part of the increase in the poverty
rate in the United States over the 1959-1973 period.
c. Rapid economic growth contributed to a decline in the poverty rate in the United States
during the 1959-1973 period.
d. Benefits provided by cash transfer programs caused the poverty rate to be higher in the
1970s than it would have been in the absence of these programs.
ANSWER: c
9. The poverty rate is defined as:
a. the ratio of poor people to the U.S. population.
b. the ratio of poor people to rich people.
c. the ratio of poor people to employed people.
d. the ratio of poor people to unemployed people.
ANSWER: a
10. All of the following help to explain the increase in the pre-transfer poverty rate over the
1979-2001 time period except:
a. the changing composition of the poverty population.
b. a decline in government transfers.
c. the increasing incidence of unemployment.
d. the impact of government transfers on work incentives.
ANSWER: b
Test Bank  417
11. Over the 1979-2001 period the government cash transfers:
a. increased the average poverty rate by 3.5 percent.
b. increased the average poverty rate among older Americans.
c. increased the average poverty rate among female-headed households.
d. reduced the average poverty rate by 7.5 percent
ANSWER: d
12. Which of the following statements is not correct?
a. TANF is financed by the federal government through bloc grants to the states.
b. Each state is allowed to design and implement its own TANF program, including benefit
levels and criteria for eligibility.
c. TANF recipients are prohibited from required to engage in work or "work activities."
d. TANF households are limited to 5 years of support in a lifetime, but states may impose
shorter lifetime limits.
ANSWER: c
13. Public assistance programs provide benefits in the event of:
a. inflation.
b. unemployment.
c. retirement.
d. low-income.
ANSWER: d
14. A package of means-tested transfers would not include which of the following?
a. TANF.
b. Food stamps.
c. EITC.
d. Wage subsidies.
ANSWER: d
15. The lack of affordable childcare can significantly hinder the labor market participation of adults
in poor families. Which of the following are provided by federal and state governments to
provide childcare assistance?
a. The Child and Dependent Care Tax Credit.
b. The Child Care and Development Fund.
c. The Child Tax Credit.
d. All of the above.
ANSWER: d
16. All of the following have contributed to the growth in female-headed households except:
a. an increase in divorce rates.
b. a decline in out-of-wedlock childbearing.
c. a decline in remarriage rates.
d. a decline in marriage rates.
ANSWER: b
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17. Individuals in households headed by females are more likely to live in poverty because:
a. family income generally falls as a result of divorce.
b. it may be difficult for a mother who has never been married to collect child support.
c. females generally have less education than males, and therefore may be able to obtain only
low-paying jobs.
d. All of the above.
ANSWER: d
18. Jack and Jill are both drillers for Mother Goose Well, Inc. They are equally qualified for the
position, but Jack receives a higher salary than Jill. This is an example of:
a. labor market discrimination.
b. nonemployment discrimination.
c. occupational discrimination.
d. the male-female wage differential.
ANSWER: a
19. The earnings differential is the greatest between white males and:
a. white females.
b. black males.
c. black females.
d. Hispanic females.
ANSWER: d
20. Evidence indicates that the unexplained differences in pay between white males and other
workers is:
a. relatively large.
b. relatively small.
c. growing at a relatively rapid rate.
d. is nonexistent.
ANSWER: b
21. The authors argue that labor market discrimination contributes little to poverty because:
a. the earnings differential between individuals with little education is relatively small.
b. poverty rates have persisted over time even though earnings differentials have narrowed.
c. nearly half of those living in poverty live in families headed by white males.
d. all of the above.
ANSWER: d
22. Which of the following statements is incorrect?
a. Increases in unemployment tend to increase the poverty rate.
b. The poverty rate of African-Americans has remained relatively constant over 1990s.
c. Some of the poverty gap between whites and African-Americans is due to discrimination.
d. Productivity differentials explain little of the wage differential between whites and
Hispanics.
ANSWER: d
Test Bank  419
23. Supplemental Security Income provides:
a. income for food to low-income families.
b. income to the elderly, blind, and disabled who are poor.
c. income for medical purposes to low-income families.
d. supplements the income of the poor in general, and can be used for any purpose.
ANSWER: b
24. Temporary Assistance for Needy Families (TANF):
a. is the nation's safety net program for low-income families.
b. provided cash assistance to the working poor.
c. provided cash assistance to the disabled who are poor.
d. provided families with dependent in-kind benefits for food and medical services.
ANSWER: a
25. Which of the following statements is correct.
a. TANF is financed by the federal government through bloc grants to the states.
b. TANF is the nation's safety net program for low-income families.
c. TANF was established as a replacement for AFDC.
d. All of the above.
ANSWER: d
26. The benefit that an individual receives when they have no income is referred to as:
a. the net benefit.
b. the break-even benefit.
c. the basic benefit.
d. the maximum benefit.
ANSWER: c
27. The income level at which the benefit falls to zero is referred to as:
a. the zero level of net income.
b. the basic net income.
c. the maximum income.
d. the break-even net income.
ANSWER: d
28. The rate at which benefits fall when income rises is:
a. the benefit reduction rate.
b. the benefit reduction rate.
c. the basic welfare reduction rate.
d. the break-even rate.
ANSWER: a
29. Suppose the basic benefit is $100, the benefit reduction rate is 50 percent, and net income is zero.
What is the benefit?
a. $50.
b. $100.
c. $150.
d. $200.
ANSWER: b
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30. Suppose the basic benefit is $200, the benefit reduction rate is 40 percent, and net income is
$100. What is the benefit?
a. $340.
b. $240.
c. $160.
d. $140.
ANSWER: c
31. Suppose the benefit is $200, the benefit reduction rate is 50 percent, and net income is $50. What
is the basic benefit?
a. $300.
b. $275.
c. $250.
d. $225.
ANSWER: d
32. Suppose the basic benefit is $360 and the benefit reduction rate is 90 percent. What is the
break-even net income?
a. $3,600.
b. $1,000.
c. $400.
d. $324.
ANSWER: c
33. Suppose the break-even net income is $700 and the basic benefit is $350. What is the benefit
reduction rate?
a. 20 percent.
b. 30 percent.
c. 40 percent.
d. 50 percent.
ANSWER: d
34. In order to determine the target efficiency of a program, the:
a. basic benefit should be examined.
b. the benefit reduction rate should be examined.
c. the break-even net income should be examined.
d. the benefit should be examined.
ANSWER: c
35. Which program would be the most target efficient?
a. A program with a break-even net income of $1,000.
b. A program with a break-even net income of $900.
c. A program with a break-even net income of $800.
d. A program with a break-even net income of $700.
ANSWER: d
Test Bank  421
36. Government provides public assistance thorough:
a. the food stamp program.
b. the Medicaid program.
c. housing assistance programs.
d. All of the above.
ANSWER: d
37. The largest public assistance program is:
a. Aid to Families with Dependent Children.
b. food stamps.
c. Medicaid.
d. housing assistance.
ANSWER: c
38. The public assistance program that likely has the most adverse effect on work effort is:
a. TANF.
b. food stamps.
c. housing assistance.
d. Supplementary Security Income.
ANSWER: a
39. TANF likely has an adverse effect on work effort because:
a. it goes to households with dependent children.
b. it has a relatively high benefit reduction rate.
c. it has a relatively low benefit reduction rate.
d. it is targeted towards female-headed households.
ANSWER: b
40. A tax on earned income will:
a. decrease work effort because individuals can work less and still maintain their standard of
living.
b. increase work effort because the opportunity cost of leisure (the net wage) is increased.
c. have an ambiguous effect on work effort because it will lower the opportunity cost of leisure,
but at the same time will cause individuals to work harder so as to maintain their living
standards.
d. increase work effort because the increased leisure that some individuals take as the
opportunity cost of leisure falls is more than offset by the number of individuals who work
harder to maintain their living standards.
ANSWER: c
41. The Child Care and Development Fund (CCDF):
a. is a federal government bloc grant that provides the states with money to help low-income
working families pay for childcare.
b. is a federal program that allows an employer to provide up to $5,000 in assistance to
employees to help them pay certain child and dependent care expenses, childcare included.
c. provides up to $500 per dependent child under age 17 for single taxpayers with income of
$84,000 or less, and for married taxpayers with income of $119,000 or less.
d. is provided by about half of the state governments to provide a credit against income tax
liability for childcare expenses for working taxpayers.
ANSWER: a
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42. The Dependent Care Assistance Program (DCAP):
a. is a federal government bloc grant that provides the states with money to help low-income
working families pay for childcare.
b. is a federal program that allows an employer to provide up to $5,000 in assistance to
employees to help them pay certain child and dependent care expenses, childcare included.
c. provides up to $500 per dependent child under age 17 for single taxpayers with income of
$84,000 or less, and for married taxpayers with income of $119,000 or less.
d. is provided by about half of the state governments to provide a credit against income tax
liability for childcare expenses for working taxpayers.
ANSWER: b
43. The Child Tax Credit (CTC):
a. is a federal government bloc grant that provides the states with money to help low-income
working families pay for childcare.
b. is a federal program that allows an employer to provide up to $5,000 in assistance to
employees to help them pay certain child and dependent care expenses, childcare included.
c. is provided by the federal government, and allows up to $500 per dependent child under age
17 for single taxpayers with income of $84,000 or less, and for married taxpayers with
income of $119,000 or less.
d. is provided by about half of the state governments to provide a credit against income tax
liability for childcare expenses for working taxpayers.
ANSWER: a
44. The effect of the benefit reduction rate on work effort is:
a. ambiguous.
b. negative because it provides the individual with more money to "purchase" leisure.
c. negative because it reduces the opportunity cost of leisure.
d. positive because it increases the opportunity cost of leisure.
ANSWER: c
45. Which of the following is a policy designed primarily to help the working poor?
a. workfare.
b. child support assurance.
c. TANF.
d. earnings supplements.
ANSWER: d
46. Congress, under the Family Support Act of 1988,
a. required states to expand Medicaid coverage for up to 12 months for families leaving AFDC
for work.
b. broke the direct link between eligibility for cash assistance and Medicaid.
c. provides coverage to all children younger than six living in families with incomes below 133
percent of the federal poverty level, once the TMA is exhausted.
d. All of the above.
ANSWER: d
Test Bank  423
47. Extending Medicaid to all families whose income is below the poverty line would:
a. increase the tax cost of Medicaid.
b. decrease the tax cost of Medicaid.
c. significantly increase the opportunity cost of Medicaid.
d. decrease the opportunity cost of Medicaid.
ANSWER: a
48. In order to provide earnings supplements to the working poor government could:
a. lift restrictions that prevent the working poor from receiving AFDC payments.
b. provide a wage subsidy to the working poor.
c. lower the minimum wage so that employers would be willing to hire more of the working
poor.
d. extend Medicaid coverage to the working poor.
ANSWER: b
49. Some feel that raising the minimum wage in order to help the working poor is undesirable
because:
a. it is target inefficient.
b. it is target efficient.
c. it will increase employment among the working poor.
d. employment in high-wage industries will be adversely affected.
ANSWER: a
50. One advantage of a wage subsidy over a minimum wage is the fact that:
a. the wage subsidy will not increase work effort.
b. a wage subsidy will be more target efficient than a minimum wage.
c. the wage subsidy will reduce unemployment among the working poor.
d. All of the above.
ANSWER: b
51. Most of the benefits of TANF:
a. go to the non-poor.
b. go to the poor.
c. go to the working poor.
d. are indirectly channeled to private day care providers.
ANSWER: b
52. Establishment of the Child Support Enforcement program created a bureaucracy to enforce
private child-support obligations for all AFDC recipients. To this end, the 1984 legislation
require the states:
a. to adopt expedited procedures for obtaining child-support orders from the courts.
b. to establish child-support guidelines for the courts.
c. to initiate automatic paycheck withholding for child support beginning one month after
failure to pay.
d. Do all of the above.
ANSWER: d
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53. In general, workfare has been found to:
a. have no impact on welfare outlays.
b. reduce welfare outlays.
c. increased welfare outlays.
d. encourage the breakup of the family.
ANSWER: b
54. Problems with child support include the fact that:
a. the size of the awards as a percentage of income vary greatly.
b. the process of setting the awards is relatively inexpensive.
c. new privacy laws make the awards difficult to collect.
d. All of the above.
ANSWER: a
55. The core anti-poverty programs (Food Stamp, TANF, and EITC):
a. would not have an adverse effect on work effort.
b. would decrease unemployment among the poor.
c. would probably not discourage heads of low-income households from working.
d. would probably discourage heads of low-income households from seeking high paying jobs.
ANSWER: d
Essay and Discussion Questions
1. Evaluate the following statement. "Instead of providing the poor with public housing,
government should provide the poor with subsidies that could be used for private
housing."
There a several advantages associated with the latter policy. Public housing units are developed,
owned, and run by local authorities. The federal government subsidizes both the costs of
construction as well as a portion of the operating costs. This subsidy gives developers and
operators little incentive to minimize costs. Further, there are only a limited number of public
housing units available. The number of people desiring housing exceeds the number of units
available. Allowing the poor to use subsidies for any housing units available would eliminate the
problem of excess demand. Further, since the building and operation of private units is not
subsidized by government, resources are used more efficiently.
2. Evaluate the following statement. "Increase in the unemployment rate will tend to
increase the poverty rate."
This statement is correct. As a group, the poor lack the skills and patterns of work force
attachment that are in great demand in the labor market. As a result, they tend to be hit harder
than other groups when the economy goes into a downturn.
3. Evaluate the following statement. "Poor people are basically unmotivated. If people
really want to succeed, the United States offers plenty of opportunities to advance."
This statement ignores the fact that most of the poor live in families where at least one parent
works. While the economy in the United States does offer opportunity, individuals must have
the necessary skills to take advantage of these opportunities. Many of the poor lack these skills,
and as a result are trapped in jobs where they earn the minimum wage. Further, this statement
ignores the possibility of discrimination. Even if an individual is well qualified, certain
opportunities may be closed to them because of the presence of employment or nonemployment
discrimination.
Test Bank  425
4. Janice receives a benefit payment of $175 per month. The benefit reduction rate is 75
percent. Carefully explain the effect of this benefit on Janice's work effort.
First examine the effect of the benefit itself. The benefit increases Janice's income. To the extent
that leisure is a normal good, increases in income will cause more leisure to be "purchased." If
Janice consumes more leisure (because there are only a limited number of hours available in a
day) she must work less. The benefit reduction rate lowers the opportunity cost of leisure
because it lowers the reward associated with work. This will work to increase the amount of
leisure Janice consumes. Theoretically, the benefit and the benefit reduction rate result in a
decrease in Janice's work effort.
5. Evaluate the following statement. “Labor market discrimination has a significant impact
on poverty rates in the United States.”
The student should recognize that labor market discrimination is not a major contributor to
poverty. Almost half of the poor live in families headed by while males. These families would
not be affected by labor market discrimination. Further, evidence indicates that the earnings
differential in lower-paying occupations is relatively smaller than the earning differential in
higher-paying occupations. Earnings differentials between those with less education is also less
than the earnings differentials that exist between those with more education. Another factor is
the fact that poverty rates have persisted even though earnings differentials have narrowed.
Finally, the earnings penalty imposed by discrimination would not be large enough in many
cases to cause poverty (to move the family’s income from above the poverty threshold to below
the poverty threshold).
Problems
1. Suppose the basic benefit is $500, the benefit reduction rate is 60 percent, and net income is
$200. What is the amount of the benefit?
The benefit can be found by solving the following equation:
B = BB - BRR(NI).
B is the benefit, Bb is the basic benefit, BRR is the benefit reduction rate, and NI is net income.
Plugging numbers into the equation we find the benefit is $380 ($500 - 0.6($200)).
2. Suppose the basic benefit is 300, the benefit reduction rate is 70 percent, and net income is
zero. What is the amount of the benefit?
The benefit is found by using the equation:
B = BB - BRR(NI).
Plugging numbers into the equation we find the benefit is $300 ($300 - 0.70(0)).
3. Suppose the benefit is $175, the benefit reduction rate is 40 percent, and net income is
$100. What is the basic benefit?
By solving the equation:
B = BB - BRR(NI)
for BB we can find the basic benefit. Rearranging this equation we find the basic benefit is given
by:
BB = B + BRR(NI).
Plugging numbers into this equation we find the basic benefit is $215 ($175 + 0.40(100)).
4. Suppose the benefit is $400, the basic benefit is $600, and the benefit reduction rate is 20
percent. What is net income?
By solving the equation:
B = BB - BRR(NI)
426  Chapter 12/Poverty: Old and New Approaches to a Persistent Problem
for NI we can find net income. Rearranging this equation we find net income is given by:
NI = (BB - B)/BRR.
Plugging numbers into this equation we find net income is $1,000 ([$600 - $400]/0.2).
5. Suppose the basic benefit is $250 and the benefit reduction rate is 20 percent. What is the
break-even net income?
The break-even net income can be found by solving the following equation:
BENI = BB/BRR.
Plugging numbers into this equation we find the break-even net income to be $1,250
($250/0.20).
6. Suppose the basic benefit is $300 and the break-even net income is $2000. What is the
benefit reduction rate?
By solving the equation:
BENI = BB/BRR
for BRR we can find the benefit reduction rate. Rearranging this equation we find the benefit
reduction rate is given by:
TRR = BT/BENI.
Plugging numbers into this equation we find a benefit reduction rate of 0.15 ($300/$2,000).