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Real Interest Rate

Reading Q-A

Time required: 30 minutes

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This article on the real interest rate examines the difference between real and nominal rates, and discusses the real interest rate’s effects on borrowing, lending, and investing.

In Class Handouts

(Note: the answer key is available at the St. Louis Fed's Econ Lowdown Teacher Portal. See the online assignment section for more information.)

As an Online Assignment

Visit the Reading Q&As in the St. Louis Fed’s Econ Lowdown Teacher Portal, to assign an online version of the student materials and to collect student scores on the questions. The materials are still free—but having them in the portal keeps students from accessing the answer key.

Related Resources

Getting Real about Interest Rates – The Economic Lowdown Podcast Series

Real versus Nominal Values: Let’s Go to the Movies!

Voluntary National Content Standards in Economics

Standard 12: Interest rates, adjusted for inflation, rise and fall to balance the amount saved with the amount borrowed, which affects the allocation of scarce resources between present and future uses.

  • Benchmark 1, Grade 12:  The real interest rate is the nominal or current market interest rate minus the rate of inflation.
  • Benchmark 2, Grade 12: Higher real interest rates increase the rewards for saving and make borrowing more expensive.
  • Benchmark 3, Grade 12: Real interest rates normally are positive because people must be compensated for deferring the use of resources from the present into the future.
  • Benchmark 5, Grade 12: Higher real interest rates reduce business investment spending and consumer spending on housing, cars, and other major purchases.
  • Benchmark 6, Grade 12: Real interest rates rise and fall to balance the amount saved with the amount borrowed. This affects the allocation of scarce resources between present and future uses.

Standard 20: Federal government budgetary policy and the Federal Reserve System’s monetary policy influences the overall levels of employment, output, and prices.

  • Benchmark 2, Grade 12: In the short run, increasing federal spending and/or reducing taxes can promote more employment and output, but these polices also put upward pressure on the price level and interest rates. Decreased federal spending and/or increased taxes tend to lower price levels and interest rates, but they reduce employment and output levels in the short run.
  • Benchmark 7, Grade 12: Monetary policies are decisions by the Federal Reserve System that lead to changes in the supply of money, short term interest rates, and the availability of credit. Changes in the growth rate of the money supply can influence overall levels of spending, employment, and prices in the economy by inducing changes in the levels of personal and business investment spending.

Common Core Standards

Grades 6-12 Literacy in History/Social Studies and Technical Subjects

Key Ideas and Details

RH.11-12.1: Cite specific textual evidence to support analysis of primary and secondary sources, connecting insights gained from specific details to an understanding of the text as a whole.

RH.11-12.2: Determine the central ideas or information of a primary or secondary source; provide an accurate summary that makes clear the relationships among the key details and ideas.

Craft and Structure

RH.11-12.4: Determine the meaning of words and phrases as they are used in a text, including analyzing how an author uses and refines the meaning of a key term over the course of a text (e.g., how Madison defines faction in Federalist No. 10).


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