Both firms and households purchase investment goods to add to their stock of capital and replace existing capital that wears out.  People with households buy new houses, which is also a part of an educated investment one must consider.  The average total investment between these two categories is about 15% in the United States (real vs nominal).  The quantity of investment goods demanded depends on the interest rate, which measures the cost of the funds used to finance investment.  For an investment project to be profitable, its return (the revenue from increased future production of goods and services) must exceed the payment of the borrowed funds.  As a basic example, suppose a firm considering whether it should build a $1million factory that would yield a return of $100,000 per year, or 10%.  The firm compares this return to the cost of borrowing the $1million. If the interest rate is below 10%, the firm borrows the money in the financial markets and makes the investment.  If the interest rate is above 10%, the firm forgoes the investment opportunity and does not build the factory.  A similar decision has to be made when a person is considering purchase of a house.  The higher the interest rate, the greater the cost of carrying a mortgage.  A $100,000 mortgage costs $8,000 per year if the interest rate is 8% and $10,000 per year is the interest rate is 10 percent.  As the interest rate rises, the cost of owning a home rises, and the demand for new homes falls. Interests rates play a vital role in the economy, economist distinguish between the nominal interest rate and the real interest rate.  This distinction is relevant when the overall level of prices is changing.  The nominal interest rate is referred to as the interest rate investors pay to borrow money.  The real interest is the nominal interest rate corrected for the effects of inflation. Fortunately, the market for U.S. Treasury securities provides a way for everyone to estimate both nominal and real interest rates.  A good way to get started when examining these is to compare real and nominal interest rates you plan on using for your investment with the rates comparable maturity on U.S. Treasury securities.  As with any investment or loan, it’s simply important to understand the interest rate that you are paying or receiving.  With this knowledge, you will be able to compare it with other investments or loans and make sure you are getting a deal that is right for you and your financial situation.   Bibliography Real Interest Rates vs. Nominal Interest Rateshttp://economics.about.com/od/realinterestrates/Real_Interest_Rates_vs_N... Educational Resourceshttp://www.frbsf.org/education/activities/drecon/answerxml.cfm?selectedu... MacroEconomics- Sizth Edition. By: Charles L. Schultze pg.86http://books.google.com/books?id=RhfnbtDQFGcC&pg=PA86&dq=real+vs+nominal...