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.