The basic New Keynesian model in a closed economy is given by two equations:

i=(Y - Y_m)+ 0.96E(i'),

Y^d= -10(R -E(i') )+ 10.

Note: the notations follow textbook and lectures.

3.LetE(i')=3%andY_m= 9.8. What level of the nominal interest rate will close the output gap?

A.5%

B.4%

C.2%

D.3%