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566
PART NINE
THE REAL ECONOMY IN THE LONG RUN
the interest rate approaches the equilibrium level at which the supply and demand
for loanable funds exactly balance.
Recall that economists distinguish between the real interest rate and the nom
inal interest rate. The nominal interest rate is the interest rate as usually reported—
the monetary return to saving and cost of borrowing. The real interest rate is the
nominal interest rate corrected for inflation; it equals the nominal interest rate mi
nus the inflation rate. Because inflation erodes the value of money over time, the
real interest rate more accurately reflects the real return to saving and cost of bor
rowing. Therefore, the supply and demand for loanable funds depend on the real
(rather than nominal) interest rate, and the equilibrium in Figure 251 should be in
terpreted as determining the real interest rate in the economy. For the rest of this
chapter, when you see the term
interest rate,
you should remember that we are talk
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 Spring '10
 abijian

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