In a column in the New York Times, Harvard economist Edward Glaeser argues: “Theory and data both predict that the 1.2 percentage point drop in real interest rates that America experienced between 1996 and 2006 should cause a [housing] price increase of somewhat less than 10 percent.”

a. How can the Fed cause the real interest rate to increase or decrease?

b. Why would a decline in real interest rates cause an increase in housing prices?