Over the Last 40 Years, the Gap Between the Rich

question 94

Multiple Choice

Over the last 40 years, the gap between the rich and the poor in the United States has been increasing.Economists have justified this outcome by noting that

• A)efficiency can never be achieved without greater inequality.
• B)inequality is not a problem.
• C)inequality is a desirable policy outcome.
• D)inequality is a necessary consequence of achieving greater efficiency.
• E)efficiency should be achieved regardless of the cost.

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Definitions:

Inflation Premium (IP)

The premium added to the real risk-free rate of interest to compensate for the expected loss of purchasing power. The inflation premium is the average rate of inflation expected over the life of the security.

Default Risk Premium (DRP)

The additional yield that investors demand to compensate for the risk of default by the issuer of a bond beyond the risk-free rate.

Liquidity Premium (LP)

Liquidity Premium refers to the extra return investors demand to compensate for investing in securities with low liquidity or those difficult to sell quickly at market value.

Real Risk-free Rate

The rate of return on a risk-free investment, after adjusting for inflation. It represents the true purchasing power gained from investing.