In recent times, lifting the so-called "debt ceiling" --- the legal authority of the U.S. Treasury to issue government debt --- has become more politically contentious than in the past. Many government spending programs are funded by deficits, so if Congress were to fail to raise the debt ceiling then those programs would have to be cut back.

Formally, suppose the economy starts at potential output Y* and that there is a permanent decline in government spending G. Furthermore, assume the zero lower bound is never binding in this question.

Which of the following is true about inflation and GDP in the short run?

a. Inflation and GDP both stay the same

b. Inflation falls and GDP stays the same

c. Inflation stays the same and GDP falls

d. Inflation falls and GDP falls

e. None of the above