In fact, the reference in the Economic Advisory Council Report to stable real rates of interest does imply that depending on the inflation rates, the nominal interest rates would move up and down. Furthermore, it is necessary for banks to appreciate the need for reduction in their interest-spreads.
Similarly, when a firm’s production can’t keep pace with demand, prices move up in an attempt to restore balance. But while conceptually appealing, accurately measuring potential output is a formidable task.