In January 2021, BBC reported that the inflation rate in the 4th quarter of 2020 was 0.6%; this rate is higher than expected by the financial analysts.

a) Comment on how the inflation rate affects the price of bonds and the nominal interest rate. (20 marks)

b) If the central bank would decide to reduce the effect on the nominal rate mentioned previously in Question Two a), what is your suggestion, if you worked in the central bank? (20 marks)

c) Discuss what are the impacts of this unexpected inflation rate movement on purchasing power. (10 marks)