In an economy, the nominal median household income increases by 10% over a year. During the same period, the price of a basket of essential goods representing the absolute subsistence threshold increases by 4%. The nominal incomes of the poorest 15% of households remain completely unchanged, with several of these households initially clustered right at the subsistence threshold.
Which of the following is the most likely outcome for poverty measurements in this economy?
Both absolute poverty and relative poverty are expected to increase.
Absolute poverty will increase, but relative poverty will decrease because median income growth exceeds the rise in the cost of essentials.
Absolute poverty will remain unchanged because the nominal incomes of the poorest did not fall, while relative poverty will increase.
Both absolute poverty and relative poverty will remain unchanged because the lowest income bracket's nominal income is constant.
76 exam-style questions on AQA A Level Economics 1.7 The distribution of income and wealth: poverty and inequality (A-level only), covering 1.7.1 The distribution of income and wealth, 1.7.2 The problem of poverty, and 1.7.3 Government policies to alleviate poverty and to influence the distribution of income and wealth. Each one has a worked solution and a mark scheme showing where the marks go.