LO 1, 4 Suppose that the central bank of an economy observes an increase in real GDP but does not know what caused it.

(a) How would the central bank respond if it believes that GDP increased because of an increase in total factor productivity and that real business cycle theory is correct?

(b) How would it respond if it believes that GDP increased because of a wave of optimism and that the Keynesian coordination failure model is correct?

(c) Explain your answers to parts

(a) and (b)

with diagrams.