Fiscal Policy

Part 1 - Check Your Understanding-​ ​ U​ se the information in the paragraph to answer the questions. Assume that policymakers believed that the marginal propensity to consume (MPC) was 0.9.

Following the announcement in December 2008 that the U.S. economy had been in a recession since December 2007, Congress and President Obama passed the A​merican Recovery and Reinvestment Act (ARRA) into law in February 2009. The ARRA cut taxes by $288 billion, increased government spending by $275 billion, and increased transfer payments by $224 billion. Although not fully implemented, the majority of the government spending would take place in 2010 and 2011.

1. Was the ARRA an example of discretionary fiscal policy or nondiscretionary fiscal policy? Explain.
2. Fiscal policy is sometimes criticized for having an implementation gap. Give evidence of an implementation gap from the information in the paragraph.
3. Calculate the maximum increase in GDP that could result from the tax cut. Show your work.
4. Calculate the maximum increase in GDP that could result from the increase in government spending. Show your work.

5. Calculate the maximum increase in GDP that could result from the increase in government transfers. Show your work.

6. Based on your calculations, what is the maximum change in spending from the AARA? Show your work.

7. Predict how the ARRA affected the national debt. Explain your reasoning.

Overhead Variance Analysis

The Lubbock plant of Morril’s Small Motor Division produces a major subassembly for a 6.0 horsepower motor for lawn mowers. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows:

During the year, the Lubbock plant had the following actual production activity: (a) Production of motors totaled 50,000 units. (b) The company used 82,000 direct labor hours at a total cost of $1,066,000. (c) Actual fixed overhead totaled $556,000. (d) Actual variable overhead totaled $860,000.

The Lubbock plant’s practical activity is 60,000 units per year. Standard overhead rates are computed based on practical activity measured in standard direct labor hours.

1. Compute the variable overhead spending and efficiency variances. Enter amounts as positive numbers and select Favorable or Unfavorable.

2a. CONCEPTUAL CONNECTION Compute the fixed overhead spending and volume variances. Enter amounts as positive numbers and select Favorable or Unfavorable.

Suppose you are the governor of the Bank of Canada and the economy is experiencing a sharp rise in the inflation rate. What actions would you take in:

a. open-market operations

• sell bonds

• buy bonds

• make advances to the chartered banks

• change the overnight lending rate

b. the bank rate

• raise the rate

• lower the rate

• set the rate at the lower bound of the Bank of Canada's operating band for the overnight lending rate

• set the rate lower than the publicized target on the overnight lending rate

c. The changes outlined above would affect chartered bank cash reserves and influence the money supply by

• reducing the lending ability of the banking system by reducing cash reserves and the money supply. The result would be to increase the real interest rate, reduce investment spending, reduce aggregate demand, and reduce inflation.

• increasing the lending ability of the banking system by increasing cash reserves the money supply. The result would be to increase the real interest rate, reduce investment spending, reduce aggregate demand, and reduce inflation.

• reducing the lending ability of the banking system by reducing cash reserves and the money supply. The result would be to decrease the real interest rate, decrease investment spending, decrease aggregate demand, and reduce inflation.

• increasing the lending ability of the banking system by increasing cash reserves and the money supply. The result would be to decrease the real interest rate, increase investment spending, increase aggregate demand, and increase inflation.

Evergreen Corporation is preparing the master budget for the third quarter ending March 31, 2009.  It sells a single product for $20 a unit.  Sales are 25% cash and 75% credit.  The credit sales are collected 30% in the month of the sale and the remaining 70% is collected in the next month.  No credit sales occurred in December 2008. The December 31 inventory of finished goods is 15,000 units and projected sales are 20,000, 55000, 65,000, 75,000, and 85,000 units for the first  months of the year.  The desired ending inventory for each month is 35% of the next month's sales. The inventory of Finished Goods expected to be on hand on April 30 is 10,500 units.  Each Finished Unit requires 2 kilograms of materials at a cost of $1.00 per kilo and it takes 15 minutes to complete one unit.  Evergreen anticipates having 20,000 kilos of materials on hand at December 31, 2008.  The company requires 15% of the next month production materials needs to be available before the start of the month.  Labour is paid at the rate of $9.00 per hour and is paid when incurred.  Production overhead is incurred based on units of production and costs $1.50 per unit. Sixty percent of the purchases are paid in the month of purchase and 40% are paid in the following month.  Purchases in December 2008 were $232,500.

Operating expenses are paid in the month incurred and consist of sales commissions (8% of sales), shipping cost (4% of sales), office salaries of $15,000 a month, advertising of $2,800 per month,  and amortization of $3,200 per month, and other miscellaneous expenses of $4,500 per month.  The cash balance must not be negative. The beginning cash balance is $48,000.  Loans are obtained at the end of the month in which a cash shortage occurs and are made in even multiples of $1,000.  Interest is 1% per month based on the beginning-of-month loan balance and must be paid at the end of each month when the loan is repaid.   Evergreen paid $4,000 in cash dividends in January and purchased land for $150,000 in March paying cash.

Evergreen Corporation is preparing the master budget for the third quarter ending March 31, 2009.  It sells a single product for $20 a unit.  Sales are 25% cash and 75% credit.  The credit sales are collected 30% in the month of the sale and the remaining 70% is collected in the next month.  No credit sales occurred in December 2008. The December 31 inventory of finished goods is 15,000 units and projected sales are 20,000, 55000, 65,000, 75,000, and 85,000 units for the first  months of the year.  The desired ending inventory for each month is 35% of the next month's sales. The inventory of Finished Goods expected to be on hand on April 30 is 10,500 units.  Each Finished Unit requires 2 kilograms of materials at a cost of $1.00 per kilo and it takes 15 minutes to complete one unit.  Evergreen anticipates having 20,000 kilos of materials on hand at December 31, 2008.  The company requires 15% of the next month production materials needs to be available before the start of the month.  Labour is paid at the rate of $9.00 per hour and is paid when incurred.  Production overhead is incurred based on units of production and costs $1.50 per unit. Sixty percent of the purchases are paid in the month of purchase and 40% are paid in the following month.  Purchases in December 2008 were $232,500.

Operating expenses are paid in the month incurred and consist of sales commissions (8% of sales), shipping cost (4% of sales), office salaries of $15,000 a month, advertising of $2,800 per month,  and amortization of $3,200 per month, and other miscellaneous expenses of $4,500 per month.  The cash balance must not be negative. The beginning cash balance is $48,000.  Loans are obtained at the end of the month in which a cash shortage occurs and are made in even multiples of $1,000.  Interest is 1% per month based on the beginning-of-month loan balance and must be paid at the end of each month when the loan is repaid.   Evergreen paid $4,000 in cash dividends in January and purchased land for $150,000 in March paying cash.

1. Taxpayer, who owns a wine bar, purchases a piece of equipment from the bar owner next door for $50,000. The equipment is placed in service during the third quarter of the year. Taxpayer also purchases a warehouse in September to store her product for $600,000. The building is placed in service in the fourth quarter. Assuming no Sec 179 is taken, what is taxpayer’s total depreciation deduction in year 1 for these assets?
   1. $7,145
   2. $15,491
   3. $54,494
   4. $650,000

A company has sales of automobiles in the past three years as given in the table below. Using trend and seasonal components, predict the sales for each quarter of year 4.

A company has sales of automobiles in the past three years as given in the table below. Using trend and seasonal components, predict the sales for each quarter of year 4.

E2-6 Finding Unknown Values in the Cost of Goods Manufactured Report [LO 2-3, 2-6]

Mulligan Manufacturing Company uses a job order cost system with overhead applied to products at a rate of 150 percent of direct labor cost.

Required:
Treating each case independently, selected from the manufacturing data given below, find the missing amounts. You should do them in the order listed. (Hint: For the manufacturing costs in Case 3, first solve for conversion costs and then determine how much of that is direct labor and how much is manufacturing overhead.) (Do not round your intermediate calculations. Round your final answers to the nearest whole dollar. Enter all amounts as positive values.)