Question

6. Real and nominal interest rates (2 MARKS) (Maximum length: half-page) Figure 1 shows the trend in real rates for the Federal Funds rate in the US (equivalent to the short-

run money market interest rate) from 1956-2010. Why are the real rates sometimes negative? Use the Fisher Equation and speculate about how short-run output gaps over that period might have led to temporarily negative real interest rates.