Assume the Australian economy is originally at the long-run equilibrium.

An abrupt house price crash sends shockwaves throughout the economy.

In response to such a shock, households bring their spending on durable goods to the bare minimum, while firms cancel all future upgrade or expansion projects.

Required:

(a) Explain how the long-run aggregate supply (LRAS), the short-run aggregate supply (SRAS) and the aggregate demand (AD) will be affected by the above shock. Clearly explain why such change(s) would occur. (1 + 1 = 2 marks)

(b) Clearly explain how the above shock would affect the key macroeconomic variables (real GDP, unemployment rate and price level) in the short run. (1 mark).

(c) In order to counteract the above shock, do you recommend the government to implement expansionary fiscal policy or contractionary fiscal policy? Clearly explain why. (1 mark)

(d) Clearly explain what actions the government can undertake in order to implement the fiscal policy stance recommended in (c). (1 mark)

1. A new tractor is considered a ____________ good while food is considered a _______________ good.

1. disposable; durable
2. durable; nondurable
3. nondurable; durable
4. durable; recyclable

2. Which type of expenditure is NOT counted in GDP?

1. Exports
2. New car sales
3. Farmland purchases
4. Equipment purchases

3. John used to work at a factory but was fired because his job can now be done with a machine. Now he cannot find a similar job. What type of unemployment is John experiencing?

1. Fictional
2. Cyclical
3. Seasonal
4. Structural

Pargo Company is preparing its master budget for 2017. Relevant data pertaining to its sales, production, and direct materials budgets are as follows.

Sales. Sales for the year are expected to total 1,000,000 units. Quarterly sales are 18%, 23%, 23%, and 36%, respectively. The sales price is expected to be $38 per unit for the first three quarters and $43 per unit beginning in the fourth quarter. Sales in the first quarter of 2018 are expected to be 10% higher than the budgeted sales for the first quarter of 2017.

Production. Management desires to maintain the ending finished goods inventories at 20% of the next quarter’s budgeted sales volume.

Direct materials. Each unit requires 2 pounds of raw materials at a cost of $10 per pound. Management desires to maintain raw materials inventories at 10% of the next quarter’s production requirements. Assume the production requirements for first quarter of 2018 are 490,000 pounds.

Prepare the sales, production, and direct materials budgets by quarters for 2017.

Quaint Stem Company is a high-end glassware manufacturer that produces fine stemware of the highest quality. The company is completing its fourth year of operations and is preparing to build its master budget for the coming year (2020). The budget will detail each quarter’s activity and the activity for the year in the total. The master budget will be based on the following information:

1. Fourth-quarter sales for 2019 are 82,000 units and 65,000 for the first quarter of 2021.
2. Unit sales by quarter (for 2020) are projected as follows:

First quarter                       66,000

Second quarter                  68,000

Third quarter                     75,000

Fourth quarter                   85,000

The selling price is $86 per unit. Cash sales make up 25% of all sales. Quaint collects 75 percent of the credit sales within the quarter in which they are realized; the other 25 percent are collected in the following quarter. There are no bad debts.

3. The beginning inventory of finished goods is 13,000 units. Required ending inventory is 25% of the next quarter’s sales in units.
4. Each stemware unit uses one and a half hours of direct labor and two units of direct materials. Laborers are paid $23.00 per hour, and one unit of direct materials costs $12.
5. There are 10,400 units of direct materials in beginning inventory as of January 1, 2019. At the end of each quarter, Quaint plans to have 10 percent of the direct materials needed for next quarter’s unit sales. The ending unit of direct materials on hand at the end of the year was 19,500.
6. Quaint buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition, and the remaining half are paid for in the following quarter. Wages and salaries are paid on the 15th and 30th of each month.
7. Fixed overhead totals $671,600 for each of the first three quarters. Of this total, $255,000 represents depreciation. During the fourth quarter, the depreciation and total fixed overhead increases by $18,575. All fixed expenses other than depreciation are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year’s total fixed overhead by the year’s expected actual units produced.
8. Variable overhead is budgeted at $5.50 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred.
9. Fixed selling and administrative expenses total $285,000 per quarter, including $50,000 depreciation.
10. Variable selling and administrative expenses are budgeted at $6
11. per unit sold. All selling and administrative expenses are paid for in the quarter incurred.
12. The balance sheet as of December 31, 2019, is as follows:

ASSETS                                                                LIABILITIES and STOCKHOLDERS’EQUITY    

Cash                                              $      52,000     Accounts Payable                                $    680,000

Accounts Receivable                     1,275,000    

Raw Materials Inventory                   124,800

Finished Goods Inventory                 656,500     Capital Stock                                         9,750,000

Plant and equipment, net              9,360,000     Retained Earnings                                 1,038,300     Total Assets                                $11,468,300                Total Liab. & Equity              $11,468,300

13. Quaint has a required cash balance of $50,000. An operating line of credit is available up to $250,000 at 8% interest. All borrowings and payments must be made in increments of $10,000 and interest is paid when principal is paid. All borrowings take place at the beginning of the quarter and all payments take place at the end of the quarter.
14. Quaint will pay quarterly dividends of $55,000. At the end of the third quarter, $525,000 of equipment will be purchased and at the end of the fourth quarter, $225,000 of equipment will be purchased.
15. The income tax rate is 30%.

Required

Prepare a master budget for Quaint Stem Company for each quarter of 2019 and for the year in total. The following component budgets must be included:

1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
5. Overhead budget
6. Ending finished goods inventory budget
7. Cost of goods sold budget
8. Selling and administrative expenses budget
9. Cash budget
10. Pro forma income statement
11. Pro forma balance sheet

1. GDP uses the market value of goods and services because it:

A. provides a common valuation that allows us to compare one economy to another.

B. provides the opportunity to compare lists of outputs to see who produced more.

C. is the only data that can be gathered about goods and services.

D. markets are the only way to value goods and services.

2. GDP counts:

A. only final goods and services, because otherwise certain things would be double-counted and the GDP would be overestimated.

B. only intermediate goods and services, because those are easier to track.

C. both intermediate and final goods and services because it is important to capture all values, regardless of which market they take place in.

D. all values that are reported to the government.

3. U.S. Gross National Product includes goods produced by:

A. foreign firms on U.S. soil.

B. U.S. firms on foreign soil.

C. foreign firms on foreign soil.

D. None of these statements is true.

4. John is a U.S. citizen who works for Walmart located in France. John's work contributes to:

A. U.S. GDP, but not U.S. GNP.

B. U.S. GNP, but not U.S. GDP.

C. both U.S. GDP and U.S. GNP.

D. neither U.S. GDP nor U.S. GNP.

5. The market value of a good or service is the:

A. price at which it is bought and solD.

B. government's valuation using the CPI.

C. price at which producers are willing to sell an output.

D. None of these statements is true.

6. The circular flow model illustrates the crucially important idea of macroeconomics, which is that:

A. every expenditure of someone in the economy is exactly equal to the income of another.

B. only two markets exist in every economy—input and output.

C. income is lower when there is more spending on goods and services.

D. the flow of two things in the economy—"stuff" and "money"—travel in the same direction.

7. Using the expenditure method to estimate GDP, we would include:

A. consumption, investment, government purchases, and net exports.

B. consumption, government revenues, durable goods, and net exports.

C. consumption, investment, government purchases, and exports.

D. consumption, investment, government purchases, and imports.

8. Investment, as a part of GDP, includes:

A. spending on productive inputs such as stocks, bonds, and other types of financial instruments.

B. any goods that are bought by firms who plan to use those purchases to produce other goods and services in the future, rather than consuming them.

C. consumption goods that are purchased by households.

D. any item you buy that you are looking for a return on over time.

Pargo Company is preparing its budgeted income statement for 2017. Relevant data pertaining to its sales, production, and direct materials budgets are as follows.

Sales. Sales for the year are expected to total  1,100,000 units. Quarterly sales are  22%,  24%,  25%, and  29%, respectively. The sales price is expected to be $ 41 per unit for the first three quarters and $ 47 per unit beginning in the fourth quarter. Sales in the first quarter of 2018 are expected to be  15% higher than the budgeted sales for the first quarter of 2017.

Production. Management desires to maintain the ending finished goods inventories at  20% of the next quarter’s budgeted sales volume.

Direct materials. Each unit requires  2 pounds of raw materials at a cost of $ 9 per pound. Management desires to maintain raw materials inventories at  10% of the next quarter’s production requirements. Assume the production requirements for first quarter of 2018 are  510,000 pounds.

Pargo budgets  0.3 hours of direct labor per unit, labor costs at $ 11 per hour, and manufacturing overhead at $ 17 per direct labor hour. Its budgeted selling and administrative expenses for 2017 are $ 6,558,000.

Calculate the budgeted total unit cost. (Round answer to 2 decimal places, e.g. 12.25.)

Prepare the budgeted multiple-step income statement for 2017. (Ignore income taxes.)

Corporation wholesales peaches and oranges. Ms. Jasper is working with the company’s accountant to prepare next year’s budget. Ms. Jasper estimates that sales will increase 6 percent for peaches and 11 percent for oranges. The current year’s sales revenue data follow:

Based on the company’s past experience, cost of goods sold is usually 70 percent of sales revenue. Company policy is to keep 10 percent of the next period’s estimated cost of goods sold as the current period’s ending inventory.

Required

1. Prepare the company’s sales budget for the next year for each quarter by individual product.

2. If the selling and administrative expenses are estimated to be $660,000, prepare the company’s budgeted annual income statement.

3. Ms.Jasper estimates next year’s ending inventory will be $34,700 for peaches and $57,900 for oranges. Prepare the company’s inventory purchases budgets for the next year, showing quarterly figures by product.

Two grams of musk oil are required for each bottle of Mink Caress, a very popular perfume made by a small company in western Siberia. The cost of the musk oil is $1.70 per gram. Budgeted production of Mink Caress is given below by quarters for Year 2 and for the first quarter of Year 3:

Musk oil has become so popular as a perfume ingredient that it has become necessary to carry large inventories as a precaution against stock-outs. For this reason, the inventory of musk oil at the end of a quarter must be equal to 20% of the following quarter’s production needs. Some 31,200 grams of musk oil will be on hand to start the first quarter of Year 2.

Required:

Prepare a direct materials budget for musk oil, by quarter and in total, for Year 2. (Round "Unit cost of raw materials" answers to 2 decimal places.)

1) The amount of time analyzed whether to buy a product is quite long. The demand for this product is

elastic or inelastic

2) The proportion of the budget spent on the item is very small. The demand for this product is

elastic or inelastic

3) An increase in the quantity demanded could be caused by: (if the product is a superior good with substitute and complementary goods. Choose all of the correct items)

a) an increase in the price of substitute goods

b) a decrease in the price of complementary goods

c) an increase in consumer income levels

4) There are lots of substitutes available. The demand for this product is

elastic or inelastic

5)The product is highly durable. The demand for this product is
      
elastic or inelastic

Master Budget Project

Okay Company is preparing to build its master budget. The budget will detail each quarter’s activity and the activity for the year in total. The master budget will be based on the following information:

1. This will be the first year of operation for Okay Company.
2. Budgeted unit sales by quarter for 2017 are projected as follows: First quarter 6,300, Second quarter 6,100, Third quarter 6,100 & Fourth quarter 6,450. First and second quarter 2018 budgeted sales units is 6,400 each quarter.
3. The selling price is $45 per unit. Sales are estimated to be collected 75% in cash and 25% credit. Of the credit sales, 85% are estimated to be collected in the quarter following the sale and 15% are collected in the second quarter following the sale.
4. Since this is the first year of operations there is no beginning inventory of finished goods at the beginning of the year. Okay’s ending finished good inventory policy is 35% of the following quarter’s unit sales needs.
5. Each unit uses 0.50 hours of direct labor and 2 units of direct materials. Laborers are paid $12 per hour and one unit of direct materials costs $4.50.
6. Since this is the first year of operations there is no beginning inventory of direct materials at the beginning of the year. Okay plans to have 30% of the direct materials needed for the next quarter’s production units on hand at the end of each quarter.
7. Okay buys direct materials on account. 80% of the purchases are paid for in the quarter of acquisition, and the remaining 20% are paid for in the following quarter.
8. Fixed overhead totals $25,000 each quarter. Of this total, $5,000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred.
9. Variable overhead is budgeted at $3 per units produced. All variable overhead expenses are paid for in the quarter incurred.
10. Fixed selling and administrative expenses total $15,000 per quarter, including $2,500 depreciation.
11. Variable selling and administrative expenses are budgeted at $1.25 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.
12. Okay will pay quarterly dividends of $10,000. During the fourth quarter, $135,000 of equipment will be purchased.

Required: Prepare a master budget for Okay Company for each quarter of 2017 and for the year in total. The following component budgets must be included:

1. Sales budget
2. Cash Collections of Sales
3. Production budget
4. Direct materials purchases budget
5. Cash Payments of Direct materials
6. Direct labor budget
7. Overhead budget
8. Operating expenses budget
9. Cash budget