Suppose We Are Initially at a Long-Run SP/LP Equilibrium with X

Multiple Choice

Suppose we are initially at a long-run SP/LP equilibrium with x = p = pe = 4.Then an adverse supply shock adds 3 percentage points to the inflation necessary to produce each level of output.An "extinguishing" policy response ________ the level of nominal GDP growth so that inflation is ________ percent while (Y/YN) ________.

A) lowers,4,falls
B) lowers,between 4 and 7,remains at 100
C) holds constant,between 4 and 7,falls
D) raises,4,remains at 100
E) raises,7,remains at 100