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Question - The George Company has a policy of maintaining an end-of-month cash balance of at least $31,000. In months where a shortfall is expected, the company can draw in $1,000 increments on a line of credit it has with a local bank, at an interest rate of 12% per annum. All borrowings are assumed for budgeting purposes to occur at the beginning of the month, while all loan repayments (in $1,000 increments of principal) are assumed to occur at the end of the month. Interest is paid at the end of each month. For April, an end-of-month cash balance (prior to any financing and interest expense) of $15,000 is budgeted; for May, an excess of cash collected over cash payments (prior to any interest payments and loan repayments) of $19,000 is anticipated.
Required -
a. What is the interest payment estimated for April (there is no bank loan outstanding at the end of March)?
b. What is the total financing effect (cash interest plus loan transaction) for May?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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