Principles of Economics- Mankiw (5th) 548

Principles of Economics- Mankiw (5th) 548 - 566 PA R T N I...

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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 25-1 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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