Question: Suppose that the central bank observes a drop in real

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?


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  • CreatedDecember 05, 2014
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