CDS (II) 2021 General Knowledge · Question 69 of 120

Correct — C, 3 1 4 2. Each curve is named after the economist who drew it, and each plots one pair of variables. The Lorenz curve plots the cumulative share of income or wealth against the cumulative share of population, so the gap between the curve and the 45-degree line of perfect equality measures inequality — that is indication 3. The Phillips curve plots the rate of wage or price inflation against unemployment and traces the short-run trade-off between them — indication 1. The Engel curve plots household spending on a good against income, and Engel's law is the observation that the proportion of income spent on food falls as income rises — indication 4. The Laffer curve plots tax revenue against the tax rate, and argues that revenue rises, peaks and then falls as the rate keeps climbing, since a hundred per cent rate would raise nothing — indication 2. So A-3, B-1, C-4, D-2.

• (a)3 4 1 2 — Puts Phillips with income and food share and Engel with inflation and employment, swapping the two middle entries. Only Lorenz is placed correctly.
• (b)2 1 4 3 — Assigns Lorenz to tax rates and revenue and Laffer to inequality, reversing the two curves whose names are easiest to confuse in a hurry.
• (d)2 4 1 3 — Gives Lorenz the tax curve and Phillips the food-share curve, so three of the four pairings are wrong.

These four curves are the standard graphical shorthand of introductory economics, and the reason the exam likes them is that each carries a whole argument in one line. Lorenz gives distributional analysis its picture and yields the Gini coefficient as a number. Phillips gave macroeconomics a trade-off that later proved unstable once expectations of inflation were built in. Engel gave the first empirical law of consumption. Laffer gave supply-side tax policy its central diagram.

A matching item of this kind is decided by fixing one anchor and letting the rest fall out. Lorenz to inequality is the pairing almost everyone knows, and it appears in options (a) and (c) only. Between those two, the split comes down to whether Phillips belongs with inflation and employment or with food expenditure, and Phillips is unmistakably the macroeconomic one. That leaves (c). It is worth adding one honest qualification about the Phillips curve: the original relationship was fitted to British wage and unemployment data and the stable trade-off it suggested broke down in the stagflation of the 1970s, so what the curve now 'indicates' is a short-run relationship rather than a menu policymakers can pick from.

• The Lorenz curve plots the cumulative share of income or wealth against the cumulative share of population; the Gini coefficient is derived from the area between it and the line of equality.
• The Phillips curve relates wage or price inflation to unemployment, and the trade-off it shows holds in the short run rather than permanently.
• The Engel curve relates spending on a good to income; Engel's law states that the share of income spent on food falls as income rises.
• The Laffer curve relates tax revenue to the tax rate, and implies revenue falls beyond some rate because the base shrinks.
• Every one of the four is named after the economist who first drew or described it.

• Swapping Lorenz and Laffer because the names sound alike.
• Treating the Phillips trade-off as permanent; the stagflation of the 1970s is the standard counter-example.
• Confusing the Engel curve, which relates quantity to income, with the demand curve, which relates quantity to price.

Almost always as a curve-to-indication match, occasionally as a single question naming the variables on the axes of one curve.

No directly related past PYQ was found.

• practice — not a real PYQ

  The Gini coefficient is derived from which one of the following?

  • (a)Phillips curve
  • (b)Lorenz curve
  • (c)Laffer curve
  • (d)Engel curve

  Answer(b) Lorenz curve — the coefficient measures the area between the Lorenz curve and the line of perfect equality.

• practice — not a real PYQ

  Engel's law states that as household income rises, the proportion of income spent on food

  • (a)rises
  • (b)falls
  • (c)stays constant
  • (d)first falls and then rises

  Answer(b) falls — the absolute amount spent on food may still rise, but its share of the budget declines.