# Using The Credit Line Tied Down T Bill Rate

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Answer 1. I plan to use the credit line tied to the 3months T-bill rate. In loanable funds market which borrowers (my firm) demand funds and lenders supply them. The price in this market is interest rate. Scenario a- The growth rate of GDP in the U.S is expected to increase Since there is an expectation on the U.S GDP to increase, this means the increasing labor force in the market that indirectly increases the consumption and investments. May be the government’s spending potential is also increasing. These factors would create more demands in the loanable funds market. So the demand and supply in the loanable funds market determines the interest rates. The following exhibit 1a shows when demand is weak (D1) and the real interest rate low…show more content…
Real interest rate = Nominal Interest Rate – Inflationary premium Exhibit 1b illustrates how inflation influences nominal interest rates. We consider a 3% market interest rate as a stable price. Assume the expected rate of inflation is zero, there will be no inflationary premium; under these conditions the nominal interest rate is equal to the real interest rate. Now there is an expectation of inflation goes higher, forecasted 2% inflation, so the real interest rate now becomes to 1% (based on the real interest rate formula). This case I am better off my firm’s future financing cost if I use the credit line. Usually it is not going to work that way. When lenders expect inflation, they will be pushing the interest rate upward by the expected inflation. This case the nominal interest rate is going to be 5% and the real interest rate would become 3%. Lenders may not always forecast the future rate of inflation accurately. If the inflation is higher than was expected then my firm will gain. On the other hand if the inflation rate is less than anticipated then lenders will gain. Therefore, no reason why the inflation will help either my firm or lenders. Answer 2: Answer 4: According to the text book the law of demand states that “there is an inverse relationship between the price of a good or service and the quantity of it that consumers are willing to purchase”. That being said, in general the demand curve will be in a downward slope.