Question

Which one of the following statements is true? (LO6, 7) a) The poor pay higher prices to buy groceries, furniture, and appliances. b) Low-income families can pay over \(\$ 500\) more for the same car bought by a higher-income household. c) The poor pay higher interest rates than people with higher incomes. d) Very few poor people can claim the earned income tax credit.

Short answer

The true statement among the given choices is (statement c) The poor pay higher interest rates than people with higher incomes.

Step-by-step solution

Evaluate statement a

The poor pay higher prices to buy groceries, furniture, and appliances. This statement can vary depending on the situation and location. However, it could be true that the poor sometimes pay higher prices because they may not have access to transportation to get to cheaper stores, or they may not be able to buy in bulk which often leads to discounts. This statement may or may not be true in every situation.

Evaluate statement b

Low-income families can pay over \(\$ 500\) more for the same car bought by a higher-income household. When it comes to buying a car, low-income families may not have access to affordable financing options or may not be able to negotiate with the sellers as effectively as higher-income families. This statement could be true.

Evaluate statement c

The poor pay higher interest rates than people with higher incomes. Generally, people with lower incomes and worse credit scores are seen as riskier borrowers by financial institutions, and they are therefore charged higher interest rates than those with better credit scores. This statement is true.

Evaluate statement d

Very few poor people can claim the earned income tax credit. The earned income tax credit (EITC) is a tax credit designed specifically to benefit low-income working families. Therefore, it is not true that very few poor people can claim it, as it was designed to assist them specifically. This statement is false. With the evaluation of each statement complete, we can conclude that: (statement c) The poor pay higher interest rates than people with higher incomes, is the true statement among the given choices.

Key concepts

Poverty and Pricing

Understanding the relationship between poverty and pricing involves recognizing how economic disadvantages can translate into higher costs for essential goods and services. Individuals living in poverty may face higher prices for groceries, furniture, and appliances for several reasons. Due to a lack of access to transportation, they might be unable to reach more competitively priced retailers or wholesale markets, which are often located outside underprivileged areas. Additionally, inability to buy in bulk, which typically results in per-unit discounts, places a higher financial burden, known as the 'poverty penalty', on these individuals.
This 'poverty penalty' can manifest in various ways, such as increased energy costs due to inefficient housing or lack of access to online deals due to no internet connectivity.
As educators, we aim to foster awareness about these economic mechanisms to cultivate more empathetic and knowledgeable citizens who can contribute to equitable solutions in the future.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a tax benefit designed to aid low-to-moderate income working individuals and families, particularly those with children. It reduces the tax burden and can lead to a refund if the credit exceeds the amount of taxes owed. Contrary to the misconception that 'very few poor people can claim the EITC', it is, in fact, a widely claimed credit that has an outsized beneficial impact on these populations.
Understanding the EITC is crucial for students not only to grasp economic concepts but also to recognize how tax policy can be structured to alleviate financial hardship for working people. By increasing their disposable income, the EITC helps to promote financial stability and can reduce the need for social services.

Financial Inequality

Financial inequality is a broad term encompassing the varying levels of wealth and income among different groups in society. This disparity can be seen in the availability of resources, assets, and opportunities. A clear manifestation of this is the additional costs lower-income individuals must bear, such as paying over $500 more for the same car due to lack of access to affordable financing and effective negotiation skills.
This discrepancy contributes to a perpetuating cycle of poverty, where those with limited resources are systematically disadvantaged. Inequality is not just limited to earnings but extends to wealth accumulation, educational opportunities, and social mobility. By understanding the roots and ramifications of financial inequality, students are better positioned to address and advocate for policies that promote a more equitable society.

Credit Scores and Interest Rates

Credit scores serve as a gauge of an individual's creditworthiness, based on their history of debt repayment and financial behavior. These scores directly influence the interest rates that individuals are required to pay on borrowed funds. People with lower incomes and poor credit scores are considered high-risk borrowers and, consequently, face higher interest rates. This creates an added financial burden and can contribute to a deepening cycle of poverty and debt.
It's vital for students to comprehend how credit scores can compound financial inequality, as it affects an individual's ability to afford homes, education, and even day-to-day living expenses. Understanding the principles behind credit scores and interest rates prepares students to manage their personal finances effectively and promotes responsible financial decision-making.