I was watching American TV. They interviewed an economist from Ivy League university. He said

It's called a real interest rate because if prices stay the same, lending money is the same as lending real goods.

Please see the title of this post. That's my question 1.

  1. How does "if prices stay the same, lending money is the same as lending real goods" explain why the real interest rate is called the real interest rate?

1 Answer 1


Lending money is on fundamental level equivalent to lending goods because you can use the money to buy some goods and services. If a truck cost \$100,000 and you finance that truck purchase via getting bank loan, then on fundamental level that is equivalent of the bank just lending you the truck.

Next, in economics 'real' essentially means inflation/deflation adjusted. Opposite of 'real' variable (e.g. real consumption, real investment, real spending, real output etc) is not imaginary or unreal variable but nominal variable (that is variable that does not take into account change in price level e.g. nominal consumption, nominal investment, nominal spending, nominal output etc.).

If prices do not change from period to period (i.e. there is no inflation or deflation), then any interest rate on a loan will represent real interest rate because by Fisher equation (see Mankiw Macroeconomics pp 110) the real interest rate is given by:

$$r \approx i - \pi$$

where $r$ is real interest rate, $i$ is nominal interest rate and $\pi$ is inflation. If $\pi=0$ then any nominal interest rate you pay at the bank is virtually equivalent to real interest rate.

Moreover, since prices do not change borrowing money from bank is on fundamental level equivalent to borrowing real goods from the bank since if you borrow \$100 you can finance \$100 worth of real consumer spending.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.