Set out how an economy's long-run growth rate and the volatility of that growth relate to the typical level of real short-term rates

The average real short-term interest rate is tied to the economy's growth path. When trend growth is high, households expect higher future income and want to consume more now, so a higher real rate is needed to persuade them to save rather than borrow. The link to growth volatility depends on the model. In the curriculum's framework, more volatile growth makes investors require a higher real return for deferring spending, so real rates rise with volatility, whereas in standard consumption models more uncertainty prompts precautionary saving, which lowers real rates. The trap is to think the average real rate is set by the central bank: policy can move rates around their average over a cycle, but the average reflects growth and its volatility.