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The Effects of Real vs. Nominal Interest Rates on Investment: A Classroom Exercise

Author

Listed:
  • Denise Hazlett

    (Whitman College)

  • Joshua Wookey

    (Whitman College)

Abstract

According to Kennedy (2000), the difference between real and nominal interest rates constitutes the most important concept taught in macroeconomics courses. The classroom exercise described in this article demonstrates one way in which real and nominal interest rates differ, namely in their effect on aggregate investment. Students assume the roles of borrowers and lenders who have the opportunity to undertake productive investment projects. By negotiating loans with each other and making their individual investment decisions, students generate aggregate data which they then analyze. In their analysis, they see how real versus nominal interest rates affected aggregate investment. The exercise uses a non-computerized double oral auction which takes 35-50 minutes to run, and works with classes of 12 to 60 students.

Suggested Citation

  • Denise Hazlett & Joshua Wookey, 2003. "The Effects of Real vs. Nominal Interest Rates on Investment: A Classroom Exercise," Journal of Economic Insight (formerly the Journal of Economics (MVEA)), Missouri Valley Economic Association, vol. 29(1), pages 109-122.
  • Handle: RePEc:mve:journl:v:29:y:2003:i:1:p:109-122
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    More about this item

    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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