ESSAY: evaluate the consequences of high levels of inequality for a developed economy

Question 1

Definitions of inequality?

Answer 1

Inequality-Economic inequality is the difference in how assets, wealth, or income are distributed among individuals and/or populations. It is also described as the gap between rich and poor or the “wealth gap”

Question 2

Disadvantages of inequality in a developed country

Diagram choice

Answer 2

-Lower quality of life for people, especially for those stuck in low wage cycles or real wage decreases ie in the public sector of an economy
-less productivity and motivation in the short term, means less output and lower economic growth
-large proportions of the population who are paying lower taxes and contributing less to consumption mean a fall in AD
-higher income workers have a higher marginal propensity to save which may reduce the multiplier effect
Diagram=fall in AD on LRAS

Question 3

Advantages of inequality in a developed country

and diagram choice

Answer 3

• may serve as a motivator to low income people to work harder and better their income in the long run
• helps to reduce inflationary pressure as less demand pull inflation due to less money in circulation ie money supply is lower
• short run AS and AD diagram to show low inflation/deflation

Question 4

What does this depend on?

Answer 4

• the extremity of the inequality illustrated by the Lorenz curve
• short term long term ie motivation/ demotivation