The real risk-free interest rate is the return investors require on a zero-risk instrument with no inflation. Since no such security or economic environment exists, the real risk-free rate is admittedly a theoretical concept. It forms the basis for all expected returns and observed interest rates in the economy. Although it cannot be observed directly, it can be estimated. Studies indicate that, over time, the real risk-free interest rate in a country is approximately equal to the economy’s longrun growth rate. But short-term influences can lead to increase or reductions in the real risk-free rate. For example, short-term increases in growth above long-term trends (e.g., the business cycle) can cause an economy to have a larger demand for capital than a low-growth or recessionary economy. Larger government budget deficits are an additional source of demand for capital; all else being equal, they lead to higher real risk-free interest rates. Supply forces can affect the real risk-free rate as well. Changes in national savings affect the pool of funds available for investment. Actions by the Fed can affect the short-term supply of capital and real interest rates. As people typically spend more than they earn when they are young and then earn more than they spend as they grow older, the graying of the baby boomers in the US may boost the supply of capital through a positive influence on personal savings. Legislation offering tax shields or other inducements to save, such as individual retirement accounts (IRAs) and tax-deferred annuities, also increase savings and the supply of capital.