Fairfield County and a K-Shaped Economy

Answer the following questions to check your understanding of the story.

Which best defines a K-shaped economy?

a) An economy in which higher-income households experience rising incomes while lower-income households experience falling or stagnant incomes.

b) An economy in which households have unequal incomes at a single point in time.

c) An economy in which income inequality decreases over time.

d) An economy in which households rely on different income sources.

Wrong! - A K-shaped economy does not describe income inequality at a single point in time or income inequality which decreases over time. Income sources do not define a K-shaped economy.

Well Done! - A K-shaped economy refers to diverging income trends over time, with different income groups moving in opposite directions.

Why does Fairfield County illustrate a K-shaped economy?

a) Higher-income households are gaining income while lower-income households are losing income or experiencing stagnation.

b) Some households receive government benefits while others pay taxes.

c) Some towns have higher average incomes than others.

d) Income differences between households are shrinking.

Wrong! - Income differences alone do not imply a K-shaped economy without divergence over time. Tax and benefit status alone does not explain income trends. Inequality is increasing, not shrinking.

That's Right! - Fairfield shows opposing income trends: rising incomes at the top and falling or stagnant incomes at the bottom.

How has the tax bill affected the Lorenz curve for income after taxes and benefits in Fairfield County?

a) The Lorenz curve has become the line of equality.

b) The Lorenz curve has moved closer to the line of equality.

c) The Lorenz curve has moved farther away from the line of equality.

d) The Lorenz curve has rotated but inequality is unchanged.

Wrong! - Inequality has risen, not fallen. Perfect equality has not been achieved. A change in inequality changes the Lorenz curve’s distance from the line of equality.

Correct! - Higher-income households receive tax cuts while lower-income households lose benefits, increasing inequality.

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