Which of the following best describes income inequality trends over the last few decades?

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Question restatement: Which of the following best describes income inequality trends over the last few decades?

Option 1: 'It has declined, which has a negative effect on the economy' This is generally at odds with the empirical record. Across many advanced economies and several developing ones, income inequality has not declined; in fact, it often rose since the 1980s. If inequality were to decline, the claim that this would have a negative economic effect would require evidence that lowering inequality somehow harmed growth, which is not the conventional interpretation in most literature.

Option 2: 'It has been growing, which has a negative effect on the economy' This aligns with a substantial body of research showing rising income inequality in recent decades. Higher inequality can be linked to slower economic growth, reduced social mobility, underinvestment in human capital, and potential demand effects, all of which are typically framed as negative consequences for the economy. The statement reflects a commonly observed global trend and its associated concerns about macroeconomic and social outcomes.

Option 3: 'It has been growing, which is good for the economy' While some arguments emphasize that inequality can incentivize investment or innovation in certain contexts, the prevailing consensus in economic research generally views sustained rises in income inequality as harming broad-based growth and social welfare. This option conflicts with mainstream interpretations that stress the potential detrimental effects of high inequality on growth, stability, and opportunity ecosystems.

In summary, option 2 captures the widely discussed trend of rising income inequality and its commonly cited negative implications for economic performance, whereas options 1 and 3 either contradict observed trends or assign a positive economic impact to rising inequality that is not supported by the general evidence base.

FINA3401.13791.202610 Practice Quiz CH 4

Which of the following best describes income inequality trends over the last few decades?

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