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The sentence is:
Inside the hollowed interior laid a small package wrapped in wax paper
It is a SAT question and you have to decide whether laid is correct or not. The options where:
A) no change B) lying C) lay D) lain
None of these seem correct. I would have chosen "lied" if I wasn't given options. The answer is C. Could someone tell me why C is the answer?
The question is meant to put you in a quandary, so it is not surprising that it does. Your "competence" would be attested by the quandary being of infinitesimal duration.
As noted by others, lie is irregular, with a preterite form lay. The rest of Tushar's comment*) is misleading: there is little sheer coincidence involved, since the two verbs are so closely linked and since there is little combinatorial space with such a short word for homonymy.
The case of lie and lay can be perhaps considered a classic on this site: I suggest this old post (of a moderator), where you can learn about the history of the verbs, and on a metalevel, about the process of language change that you are involved in.
*) The verb you want is lie, not lay. However, the homonym lay also happens to be the past tense of lie. Sheer coincidence.
Inside the hollowed interior lay a small package wrapped in wax paper.
The boy lay on the bed and dreamed away the afternoon. [preterit, simple past] The boy was lying on the bed, dreaming away the afternoon.
Most days, the cat lies on the windowsill to look out the window. He has lain in the sun so long this morning that his mind is fuzzy.
lie, lay, lain = to be in a prone position on a surface in a prone or supine position. Either a person, animal, object or an alien [that's a joke]. Yes, it is intransitive.
VERSUS: lay, laid, laid, a transitive verb meaning to place something somewhere
She lay her head on the pillow and went to sleep. We laid our coats on the bed and went into the dining room. The chickens have laid a lot of eggs this autumn. [idiomatic expression: to lay eggs]
lie, notlay. However, the homonymlayalso happens to be the past tense oflie. Sheer coincidence.liedis the past tense of a completely different sense oflie(as in, telling lies).