In considering the response to this question, please be sure to keep in mind the definitions of inflation gap (defined as -*, or the distance of inflation from the desired level of inflation *) and output gap (defined as y minus y-bar, or the deviation of (log of) aggregate output y from (log) production capacity y-bar).

Under the optimal monetary policy, the central bank should let the nominal interest rate

a.rise when the inflation gap rises and decline when the output gap rises.

b.decline when the inflation gap rises and rise when the output gap rises.

c.decline when the inflation gap or the output gap rises.

d.rise when the inflation gap or the output gap rises.