An economist with a major bank wants to learn, quantitatively, how much spending on luxury goods and services can be explained based on consumers’ perception about the current state of the economy and what do they expect in the near future (6 months ahead).  Consumers, of all income and wealth classes, were surveyed.  Every year, 1500 consumers were interviewed.  The bank having all of the data from the 1500 consumers interviewed every year, computed the average level of consumer confidence (an index ranging from 0 to 100, 100 being absolutely optimistic) and computed the average dollar amount spent on luxuries annually.  Below is the data shown for the last 24 years.

Date                 X                     Y (in thousands of dollars)

1994                79.1                 55.6

1995                79                    54.8

1996                80.2                 55.4

1997                80.5                 55.9

1998                81.2                 56.4

1999                80.8                 57.3

2000                81.2                 57

2001                80.7                 57.5

2002                80.3                 56.9

2003                79.4                 55.8

2004                78.6                 56.1

2005                78.3                 55.7

2006                78.3                 55.7

2007                77.8                 55

2008                77.7                 54.4

2009                77.6                 54

2010                77.6                 56

2011                78.5                 56.7

2012                78.3                 56.3

2013                78.5                 57.2

2014                78.9                 57.8

2015                79.8                 58.7

2016                80.4                 59.3

2017                80.7                 59.9

Questions:

1. Measure the strength of the linear association between consumers’ moods and the dollar amounts spent on luxury items.
2. Construct the linear regression model for the dollar amount spent on luxury goods and services.
3. Explain how you would interpret the slope and the intercept of the regression model.
4. How well does our model fit the data? Explain what it means.
5. Do you think that measuring the level of optimism is a good predictor for trying to forecast future spending on luxury items?  Explain why or why not.
6. How would you be able to improve on the model?  You must provide a minimum of two specific ways to go about improving the model.
7. If the economist expects that, by year’s end, the average level of consumer confidence will hit 81.5 points, how much will be expected by consumers to spend on luxury items?

1. Create a Goods graph for each model If we increase government spending on education and infrastructure (how will this impact AD/AS)

a) Classical Model graph

b) Keynesian Model graph

c) Supply-side Model graph

Which of the activities below would cause a shift in aggregate demand?

Deliberate changes in govenment spending is an example of:

An increase in the world's economic prosperity will enable other countries to more easily buy our goods.

True

False

Adding spending will have a negative impact on the equililbrium GDP.

True

False

1. The representative consumer (the consumer that his basket of goods is the same as the "average" basket consumed by city dwellers) consumes two goods: Apple and oranges. The price of oranges is 1 dollar per unit and the price of apples is 2 dollars per unit. In year 1 the representative consumer consumed 10 units of oranges and 10 units of apples. The basket in year 1 is used to compute the CPI.

(a) In year 2 the price of oranges went up to 1.1 dollars per unit and the price of apples went up to 2.2 dollars per unit. What is the percentage change in the consumer price index (CPI)?

(b) Assume that income went up in year 2 and the income of the representative consumer is equal to the price of the basket that the consumer bought in year 1. What is the basket that is chosen by the representative consumer in year 2?

(c) Compare the welfare of the consumer in year 2 to his welfare in year 1.

2. Answer question 1 under the assumption that in year 2 the price of oranges went up to 1.2 dollars per unit but the price of apples did not change.

(a) What is the percentage change in the consumer price index (CPI)?

(b) Assume that the income of the representative consumer in year 2 is equal to the price of the basket that the consumer bought in year 1. Compare the basket chosen in year 2 to the basket chosen in year 1.

(c) Compare welfare in year 2 to welfare in year 1.

3. A consumer lives for two periods. His income in period 1 is !Y1 and his income in period 2 is Y . The consumer is free to lend and borrow at zero interest rate ( r =0

!

(a) What is the price of consumption in period 1 in terms of consumption in period 2? (How many units of period 2 consumption must the consumer give up to get an additional unit of consumption in period 1)?

(b) What is the maximum consumption that the consumer can have in the first period?

(c) Draw the budget constraint. In your graph have the endowment point, the slope and the intersections with the horizontal axis and with the vertical axis.

! 2 and!R=1+r=1).!Y1 =Y2 =10.

(d) The government introduces a tax of !T1 =5 in the first period. Use the graph in (c) to show the change in the budget line.

(e) How will the tax effect the consumer's consumption in the first period? How will it effect the consumer's consumption in the second period? (Assume that both goods are normal).

(f) Will the consumption in the first period change by more than 5 units? Why?

(g) Assume now that the government decides to impose the tax in the second period rather than the first. Will this change the budget line? Will this change the choice of consumption?

(h) Assume that initially government spending was zero in both periods. Then the government increased its spending in the first period to G =5 and financed it by

!
taxes of 5 units in the first period. What will happen to national savings? Explain.

4. Answer question 3 under the assumption that !r =0.1 (and !R =1.1 ). To simplify the calculations assume: Y =Y =11 . The questions are repeated here with slight

changes.

!1 2

(a) What is the price of consumption in period 1 in terms of consumption in period 2? (How many units of period 2 consumption must the consumer give up to get an additional unit of consumption in period 1)?

(b) What is the maximum consumption that the consumer can have in the first period?

(c) Draw the budget constraint. In your graph have the endowment point, the slope and the intersections with the horizontal axis and with the vertical axis.

(d) The government introduces a tax of !T1 =5 in the first period. Use the graph in (c) to show the change in the budget line.

(e) How will the tax effect the consumer's consumption in the first period? How will it effect the consumer's consumption in the second period? (Assume that both goods are normal).

(f) Will the consumption in the first period change by more than 5 units? Why?

(g) Assume now that the government decides to impose the tax in the second period rather than the first. Will this change the budget line? Will this change the choice of consumption? (Hint: the tax remains 5 units and not 5.5)

(h) Assume that initially government spending was zero in both periods. Then the government increased its spending in the first period to G =5 and financed it by

!
taxes of 5 units in the first period. What will happen to national savings? Explain.

Option #1: Cost of Production

Hilliard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter:

As of December 31, the end of the prior quarter, the company's general ledger showed the following account balances:

Cash $48,000 (debit)

Accounts receivable $224,000 (debit)

Inventory $60,000 (debit)

Buildings and equipment, net $370,000 (debit)

Accounts payable $93,000 (credit)

Capital stock $500,000 (credit)

Retained earnings $109,000 (credit)

Actual sales for December and budgeted sales for the next four months are as follows:

December $280,000

January $400,000

February $600,000

March $300,000

April $200,000

Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales.

The company's gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)

Monthly expenses are budgeted as follows: salaries and wages, $27,000 per month; advertising, $70,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,000 per quarter.

Each month's ending inventory should equal 25% of the following month's cost of goods sold.

One half of the month's inventory purchases is paid for in the month of purchase; the other half is paid in the following month.

During February, the company will purchase a new copy machine for $1,700 cash. During March, other equipment will be purchased for cash at a cost of $84,500.

During January, the company will declare and pay $45,000 in cash dividends.

Management wants to maintain a minimum cash balance of $30,000. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

Required tasks for Option #1:

Using the data above, finish populating the following statements and schedules for the first quarter. Submit your responses in an Excel spreadsheet:

Schedule of expected cash collections

Merchandise purchases budget

Schedule of expected cash disbursements-merchandise purchases

Schedule of expected cash disbursements-selling and administrative expenses

Cash budget:

4. AJ Co. is projecting a cash balance of $30,000 in its beginning balance for the year. AJ’s schedule of expected collections from customers for the first quarter of 2014 shows total collections of $180,000. The schedule of expected payments for direct materials for the first quarter of 2014 shows total payments of $41,000. Other information gathered for the first quarter of 2014 is sale of equipment $3,000; direct labor $70,000, manufacturing overhead $35,000, selling and administrative expenses $45,000; and purchase of securities $14,000. AJ wants to maintain a balance of at least $25,000 cash at the end of each quarter. Prepare a cash budget for the first quarter.

Sweet Company, a specialty chocolate store, prepares a master budget on a quarterly basis.  The company has assembled the following data to assist in preparing its master budget for the first quarter:

a. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances:

b. Actual sales for November and December, along with budgeted sales for the next four months, are as follows:

c. Sales are 50% for cash sales and 50% for credit sales.  Credit sales are collected in the two months following the sale: 90% the month after the sale, 10% two months after the sale.  The accounts receivable at December 31 are a result of November and December credit sales.

d. The company’s gross margin is 45% of sales.  (In other words, cost of goods sold is 55% of sales.)

e. Monthly salary and wage expenses are budgeted as follows: salaries and wages, $27,000 per month for the first two months, $26,000 in March as Sweet cuts the hours of its sales force to reflect declining sales.

f. Other monthly expenses are as follows: advertising $80,000 per month; shipping cost is 5% of total monthly sales revenues, and other expenses are 3% of sales revenues.  Depreciation, including depreciation on new assets acquired during the quarter, will be $40,000 for the quarter.

g. Each month’s ending inventory should equal 10% of the following month’s cost of goods sold.

h. One-half of a month’s inventory purchases are paid for in the month of purchase; the other half is paid in the following month.

i. During January, the company will purchase a new copy machine for $2,000 cash.  During March, other equipment will be purchased for cash at a cost of $79,500.

j. During January, the company will declare and pay $38,000 in cash dividends.

k. The company must maintain a minimum cash balance of $40,000.  An open line of credit is available at a local bank for any borrowing that may be needed during the quarter.  All borrowing is done at the beginning of a month, and all repayments are made at the end of a month.  Borrowings and repayments of principal must be in multiples of $1,000.  Interest is paid only at the time of payment of principal.  The annual interest rate is 6%.  (Figure interest on whole months, e.g., 2/12, 3/12.)

l. The company does not pay any income taxes.

Required:

Using the data above, complete the following statements and schedules for the first quarter:

1. Prepare a sales budget for the quarter ending on March 31, 20XX.

2. Schedule of expected cash collections:

3a. Merchandise purchases budget:

b. Schedule of expected cash disbursements for merchandise purchases:

4. Schedule of expected cash disbursements for selling and administrative expenses:

5. Cash budget:

6. Prepare an income statement that conforms to GAAP specifications for the quarter ending March 31, 20XX.

7. Prepare a balance sheet as of March 31, 20XX.

**PLEASE SHOW WORK**