Final answer:
The real interest rate temporarily rises when the Fed increases the nominal interest rate, because inflation does not adjust immediately. Other interest rates in financial markets generally follow the trend set by the federal funds rate. For a decline in interest rates, a rise in the supply of loanable funds is the key factor.
Step-by-step explanation:
When the Federal Reserve (commonly referred to as the Fed) increases the nominal interest rate, the real interest rate temporarily rises. This is because the real interest rate is calculated by subtracting the rate of inflation from the nominal interest rate. While the change in the nominal rate is immediate upon the Fed's action, inflation does not adjust instantly, and therefore, the real interest rate will temporarily reflect the increase in the nominal rate. Over time, inflation may adjust due to various economic factors, potentially changing the real interest rate again.
Moreover, the impact of the Fed's decision on interest rates is pervasive. When the federal funds rate rises, it typically causes other interest rates within financial markets to increase as well, although the effect on long-term rates like 30-year mortgages might be less pronounced than on short-term borrowing.
To answer the question provided, the correct option is: a. temporarily rises.
As for the additional question regarding what leads to a decline in interest rates, an increase in the supply of loanable funds tends to result in lower interest rates. Therefore, the correct choice is c. a rise in supply.