Section 2.3 - on controlling inflation says: "Low real interest rates can also lead to inflationary pressures by increasing demand. The increase in demand, described in Section 2.2, may well lead to demand-pull inflation." Having some trouble understanding how increase in interest rates will lead to increased real interest rate. (opposite scenario has been written in the Course Notes, I have taken increase in interest rate, since better it matches with reducing inflation)
Think of the real interest rate as nominal interest rate minus inflation. If nominal interest rates increase and inflation is unchanged, the real interest rate will therefore increase. But higher interest rates tend to lead to lower inflation, and this further increases the real interest rate. [Higher interest rates lead to lower inflation for various reasons, e.g. because the cost of borrowing funds increases, so there tends to be less investment spending by companies and less spending by consumers, and therefore lower demand for goods and so prices do not increase as quickly.]
