6 real and nominal interest rates 2 marks maximum length half page fig
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.
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