In this chapter we have examined investment demand by firms
and the supply of saving by households. In both cases, the
interest rate plays an important role. For firms, the interest rate
reflects the cost of financial capital required to purchase
physical capital. For households, the interest rate reflects the
benefit of delaying their spending until the future by increasing
their current saving. In both cases, though we did not say it, we
were referring to the real interest rate.
When you go on to study macroeconomics, you will learn more
about what causes inflation, and thus what forces us to make
the distinction between real and nominal interest rates. For
now, however, we assume in this chapter that there is no
inflation; thus, real and nominal interest rates are the same.
(Canada CANSIM Series V122541. Real interest rate is based on author’s calculationsSource: Based on Nominal Interest Rate: Three-Month Treasury Bill Rate, Statistics
of CPI inflation, Series PCPISA from http://www.bankofcanada.ca.))