Problem
Suppose that the central bank observes a drop in real GDP, but does not know what caused this drop.
(a) How would the central bank respond if it believed that GDP dropped because of a decline in total factor productivity, and that real business cycle theory is correct?
(b) How would the central bank respond if it believed that GDP dropped because of a wave of pessimism, and that the Keynesian coordination failure model is correct?
(c) Explain your answers to (a) and (b) with the aid of diagrams.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.