Suppose that the central bank observed a drop in real GDP, but does not know what caused this drop. -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 correct? -How would the central bank respond if it believed that GDP dropped because of a wave of pessimism, and what the Keynesian coordination failure model is correct?
Suppose that the central bank observed a drop in real GDP, but does not know what caused this drop. -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 correct? -How would the central bank respond if it believed that GDP dropped because of a wave of pessimism, and what the Keynesian coordination failure model is correct?
Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN:9781285165875
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter36: Six Debates Over Macroeconomic Policy
Section: Chapter Questions
Problem 4PA
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Suppose that the central bank observed a drop in real GDP, but does not know what caused this drop.
-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 correct?
-How would the central bank respond if it believed that GDP dropped because of a wave of pessimism, and what the Keynesian coordination failure model is correct?
-Explain your answers to both parts using diagrams.
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