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Tony and Suzie graduate from college in May 2021 and begin developing their new business. They begin by offering clinics for basic outdoor activities such as mountain biking or kayaking. Upon developing a customer base, they'll hold their first adventure races. These races will involve four-person teams that race from one checkpoint to the next using a combination of kayaking, mountain biking, orienteering, and trail running. In the long run, they plan to sell outdoor gear and develop a ropes course for outdoor enthusiasts.

On July 1, 2021, Tony and Suzie organize their new company as a corporation, Great Adventures Inc. The articles of incorporation state that the corporation will sell 23,000 shares of common stock for $1 each. Each share of stock represents a unit of ownership. Tony and Suzie will act as co-presidents of the company. The following transactions occur from July 1 through December 31.

Jul. 1 Sell $11,500 of common stock to Suzie.

Jul. 1 Sell $11,500 of common stock to Tony.

Jul. 1 Purchase a one-year insurance policy for $3,840 ($320 per month) to cover injuries to participants during outdoor clinics.

Jul. 2 Pay legal fees of $1,800 associated with incorporation.

Jul. 4 Purchase office supplies of $1,800 on account.

Jul. 7 Pay for advertising of $340 to a local newspaper for an upcoming mountain biking clinic to be held on July 15. Attendees will be charged $70 on the day of the clinic.

Jul. 8 Purchase 10 mountain bikes, paying $19,800 cash.

Jul. 15 On the day of the clinic, Great Adventures receives cash of $4,900 from 70 bikers. Tony conducts the mountain biking clinic.

Jul. 22 Because of the success of the first mountain biking clinic, Tony holds another mountain biking clinic and the company receives $5,250.

Jul. 24 Pay $800 to a local radio station for advertising to appear immediately. A kayaking clinic will be held on August 10, and attendees can pay $110 in advance or $160 on the day of the clinic.

Jul. 30 Great Adventures receives cash of $7,700 in advance from 70 kayakers for the upcoming kayak clinic.

Aug. 1 Great Adventures obtains a $41,000 low-interest loan for the company from the city council, which has recently passed an initiative encouraging business development related to outdoor activities. The loan is due in three years, and 6% annual interest is due each year on July 31.

Aug. 4 The company purchases 14 kayaks, paying $16,500 cash.

Aug. 10 Twenty additional kayakers pay $3,200 ($160 each), in addition to the $7,700 that was paid in advance on July 30, on the day of the clinic. Tony conducts the first kayak clinic.

Aug. 17 Tony conducts a second kayak clinic, and the company receives $10,800 cash.

Aug. 24 Office supplies of $1,800 purchased on July 4 are paid in full.

Sep. 1 To provide better storage of mountain bikes and kayaks when not in use, the company rents a storage shed for one year, paying $3,960 ($330 per month) in advance.

Sep. 21 Tony conducts a rock-climbing clinic. The company receives $14,900 cash.

Oct. 17 Tony conducts an orienteering clinic. Participants practice how to understand a topographical map, read an altimeter, use a compass, and orient through heavily wooded areas. The company receives $18,000 cash.

Dec. 1 Tony decides to hold the company's first adventure race on December 15. Four-person teams will race from checkpoint to checkpoint using a combination of mountain biking, kayaking, orienteering, trail running, and rock-climbing skills. The first team in each category to complete all checkpoints in order wins. The entry fee for each team is $540.

Dec. 5 To help organize and promote the race, Tony hires his college roommate, Victor. Victor will be paid $30 in salary for each team that competes in the race. His salary will be paid after the race.

Dec. 8 The company pays $1,200 to purchase a permit from a state park where the race will be held. The amount is recorded as a miscellaneous expense.

Dec. 12 The company purchases racing supplies for $2,700 on account due in 30 days. Supplies include trophies for the top-finishing teams in each category, promotional shirts, snack foods and drinks for participants, and field markers to prepare the racecourse.

Dec. 15 The company receives $21,600 cash from a total of forty teams, and the race is held.

Dec. 16 The company pays Victor's salary of $1,200.

Dec. 31 The company pays a dividend of $4,000 ($2,000 to Tony and $2,000 to Suzie).

Dec. 31 Using his personal money, Tony purchases a diamond ring for $4,100. Tony surprises Suzie by proposing that they get married. Suzie accepts and they get married!

The following information relates to year-end adjusting entries as of December 31, 2021.

Depreciation of the mountain bikes purchased on July 8 and kayaks purchased on August 4 totals $7,260. Six months' of the one-year insurance policy purchased on July 1 has expired. Four months of the one-year rental agreement purchased on September 1 has expired. Of the $1,800 of office supplies purchased on July 4, $310 remains. Interest expense on the $41,000 loan obtained from the city council on August 1 should be recorded. Of the $2,700 of racing supplies purchased on December 12, $160 remains. Suzie calculates that the company owes $13,800 in income taxes. Requirements:

1. Record each of the transactions listed above in the General Journal (these are shown as items 1 - 27).

2. Record the adjusting entries in the General Journal tab (these are shown as items 28-34).

3. Prepare the adjusted Trial Balance as of December 31, 2021.

4. Prepare an income statement for the period ended December 31, 2021

5. Prepare a statement of stockholder's equity for the period ended December 31, 2021

6. Prepare a classified balance sheet as of December 31, 2021

7. Record the closing entries in the General Journal (these are shown as items 35-37).

Assume that a consumer with only equity wealth must choose periodby-period consumption in a discrete-time dynamic optimization problem. Specifically, consider the sequence problem: (0) = sup {}=0 0 X =0 exp()() subject to the constraints: +1 = exp(++122)() = +1 ( ) iid and (0 1) [0 ] 0 0 Here represents equity 2 wealth at period and represents consumption at period . The consumer has discount rate and the consumer can only invest in a risky asset with expected return = exp( + 22) = exp() Finally, assume that the consumer has an isoelastic utility function: () = 1 1 , with [0] 6= 1 Note that this utility function has the property of constant relative risk aversion 00() 0 () = This scaling property enables us to analytically solve this problem. The associated Bellman equation for this problem is given by () = sup [0] ( ) + exp()(exp( + 2 2)) The value function takes the special form () = 1 1 We previously showed that the consumption function takes the form, = 1 where, ln(1 1 ) = 1 [(1 ) ] + 1 2 ( 1)2 We also showed that, ln +1 = 1 ( ) + 2 2 2 We are now going to reconsider the issues posed at the end of the first problem set. In particular, we are going to use the Euler Equation to price a risk free bond that is in zero net supply (i.e., every long position in this bond must be offset by a short position). We will ask what interest rate would make a consumer just willing to hold an arbitrarily small amount of the risk 3 free bond. In particular, we will assume that the amount is sufficiently small that it does not effect the properties of the consumption process. Hence, we can use the stochastic dynamics of the consumption process, which were derived above, to price the bond. 1. Note that the Euler Equation must hold for all assets in the consumer's portfolio. Explain intuitively why this is the case. 2. If the risk free bond has interest rate (with ln = ) show that the Euler Equation for the risk free asset will be, 0 () = exp()0 (+1) 3. Manipulate the Euler Equation to show that, 1 = exp { ln +1} 4. Show that ln +1 is distributed normally with mean 1 ( )+ 22 2 and variance 2 Note that we usually just assume that ln +1 is distributed normally. For this problem, we can show it exactly. You can use the intermediate results derived on the first problem set (which are summarized above). 5. Use the result of questions 3 and 4 to derive the equilibrium interest rate of the risk free bond. Now use the Consumption Capital Asset Pricing Equation (previous problem) to derive the equilibrium interest rate of the risk free bond. Your results should be the same, since both derivations are based on the Euler Equation. 6. Defend the assumption that the amount of risk free bond is in zero net supply (i.e., that the net amount available is zero). 7. In this model economy = 2 Is this true in the real world? Why or why not?

1. (10 points) In Cambridge, shoppers can buy apples from two sources: a local orchard, and a store that ships apples from out of state. The orchard can produce up to 50 apples per day at a constant marginal cost of 25 per apple. The store can supply any remaining apples demanded, at a constant marginal cost of 75 per unit. When apples cost 75 per apple, the residents of Cambridge buy 150 apples in a day. (a) (5 points) Draw the marginal cost curve of apple production in Cambridge. (b) (5 points) Assume that the city of Cambridge sets the price of apples within its borders. What price should it set, and should the price vary depending on where you purchase your apples? Problem 1 by MIT OpenCourseWare. 2. (20 points) Tariffs are usually imposed in order to decrease imports, but they don't always have the same effect. Please draw graphs that demonstrate how shifts in the domestic supply curve for a product subject to a tariff could result in the following scenarios. (a) (10 points) No imports at all of that product. (b) (10 points) The country becoming an exporter of that product. Problem 2 by MIT OpenCourseWare. 3. (35 points) (Suggestion: It may be helpful to read section 9.6 before doing this question.) Moldavia is a small country that currently trades freely in the world barley market. Demand and supply for barley in Moldavia is governed by the following schedules: Demand: QD = 4 P Supply: QS = P The world price of barley is $1/bushel. (a) (12 points) Calculate the free trade equilibrium price and quantity of barley in Moldavia. How many bushels do they import or export? On a well-labeled graph, depict this equilibrium situation, and shade the gains from trade relative to the autarkic (no trade) equilibrium in Moldavia. (b) (12 points) The Prime Minister of Moldavia, sympathetic as always, believes he can help those hurt by free trade in barley relative to the situation in autarky. He taxes the party that has benefited from free trade (either consumers or producers) an amount per bushel that is the difference between the autarkic price of barley and the free trade price. Furthermore, he rebates the entire government revenue of the tax back to the party harmed by free trade (again, either consumers or producers). In a new, well-labeled diagram, show this post-tax equilibrium situation. Calculate and show: The new equilibrium price and quantity of barley in Moldavia Changes in the quantity of imports or exports The amount of revenue collected by the Prime Minister Who pays the larger burden of this tax, consumers or producers in Moldavia? Why? (c) (11 points) Are the free trade losers better off or worse off after the rebate than they were under autarky? Why? On your diagram from (b), shade the DWL (if any) of this tax rebate policy, relative to the free trade equilibrium you found in (a).

2. (24 points) Consider the following version of model 5. Except where indicated, variables are expressed in current year terms thus the "t" subscript has been suppressed. Be sure to show your work for all parts.

IS Curve: Y = Yp - (r - ) + NX+ Net Exports NX = x0 - x1*E Fisher Equation: r = i - e Phillips Curve: = e + (Y - Yp) + v Inflation Expectations: e = -1 Monetary Rule: i= + + *( - *) + (1- )*(Y-Yp) 0 < < 1

Endogenous variables: Y, r, NX, , e, i Exogenous variables: Yp, , , E, x0,v, *

(6) a. Derive the dynamic aggregate demand curve. Indicate its slope. (3) b. Determine the dynamic aggregate supply curve and indicate its slope. (8) c. Paul Krugman, Olivier Blanchard and others have suggested that the inflation target (*) be raised to 4%. What would happen to the paths for output and inflation if monetary policy reflected this new inflation target? (7) d. How would the results in d change if inflation expectations were rational?

Part II (12 points each) Answer three of the following questions. Indicate any noteworthy assumptions.

1. Evaluate the quotation at the beginning of the exam. If you believe that it is true, provide evidence to support your assertion. If you believe that it is false, how would you change the statement to make it true? Provide evidence to support your claim.

2. Use Model 4 to determine the effect of an exogenous increase in net exports on GDP, P, L, U, W/P and r. Assume Y < Yp . Provide graphics to support your claim.

3. Use Model 5 to determine the paths of output and inflation if there is a positive aggregate supply shock in period t (i.e., vt < 0). Provide graphics to support your claim.

4. The Iron Triangle or Impossible Trilogy a. In terms of policy making regarding openness of the economy, what three policy options must be jointly considered by macroeconomic policy makers? Explain why the third policy depends upon the choice of the first two. b. In light of the Iron Triangle, why might large countries and small countries make different policy choices?