In 2005, the United Kingdom was close to full employment. Nominal GDP was £800 billion, the real interest rate was 4 percent a year, the inflation rate was 6 percent a year, and the price level was 120.
a. Calculate the nominal interest rate.
b. If the real interest rate remains unchanged when the inflation rate in the long run decreases to 3 percent a year, explain how the nominal interest rate changes.