Self-Perpetuation of Wealth and Social Inequality

An individual with a net worth of $50 million decides to invest a significant portion of her capital into a portfolio of high-risk, high-potential-return technology startups. A second individual, with a net worth of $50,000, allocates the majority of their savings to a low-yield, federally-insured savings account. Which of the following statements best explains the economic principle underlying the first individual's investment strategy and its likely long-term outcome?

Analyzing the Cycle of Wealth Accumulation

Arrange the following events to correctly illustrate the process where substantial wealth can become a self-sustaining, beneficial cycle.

The Self-Perpetuating Nature of Wealth

Explaining Investment Behavior Disparities

The virtuous circle of wealth functions primarily because individuals with substantial wealth possess a superior innate ability to identify high-yield investment opportunities compared to those with less wealth.

Match each component of the self-sustaining cycle of wealth accumulation with its corresponding description or direct consequence.

In the self-sustaining cycle of wealth accumulation, an individual's substantial financial holdings can reduce their situational ______, making them more willing to invest in high-yield assets that can further increase their wealth.

Evaluating a Policy to Counter Wealth Accumulation

A financial analyst observes that, on average, clients with over $10 million in assets achieve significantly higher percentage returns on their investment portfolios compared to clients with less than $100,000. Based on the economic principle of a self-sustaining wealth cycle, what is the most direct cause for this observed disparity in returns?

Example of the Virtuous Circle of Wealth: Marco's Case

Self-Perpetuation of Wealth and Social Inequality

Disrupting the Poverty Trap by Mitigating Risk

An individual with very limited savings is offered two investment opportunities: a low-interest savings account with guaranteed returns, and a new business venture with the potential for very high profits but also a significant risk of losing the entire investment. The individual chooses the savings account. Which statement best analyzes the core mechanism that can trap this person in a self-perpetuating cycle of poverty?

Evaluating a Micro-Loan Program

The Subsistence Farmer's Dilemma

A self-perpetuating cycle can emerge where an individual's initial financial circumstances prevent them from improving their economic standing. Arrange the following statements to correctly describe the causal sequence of this cycle, starting from the initial condition.

The Connection Between Risk Aversion and Persistent Poverty

Analyze each of the following situations. Match each situation to the outcome it is most likely to produce regarding the cycle of poverty.

The self-perpetuating cycle of poverty primarily occurs because individuals with limited financial resources are naturally more inclined to take on high-risk investments in the hope of achieving high returns.

In the context of a self-perpetuating poverty cycle, an individual's lack of initial wealth often leads to a higher degree of situational ______, causing them to favor safer, low-growth investments and thus remain financially constrained.

Urban Worker's Economic Dilemma

Evaluating Policy Interventions for Poverty Traps

Examples of High-Risk, High-Reward Actions Avoided in a Poverty Trap

Figure 8.4: The Vicious Circle of a Poverty Trap as a Lock-in Effect

Figure 8.5: The Ball-and-Hill Model of a Poverty Trap Lock-in

The Tipping Point as an Unstable Equilibrium in Poverty Traps