A nation experiences a major hurricane that destroys significant amount of capital stock. The policy makers reason that the destruction caused by the hurricane will reduce national income and that this should be counteracted through an increase in government expenditures.

1. Determine with the aid of diagrams the effects of this on current aggregate output, current employment, the current real wage.

2. Is the action suggested by the policy makers necessary, given what their goals appear to be?

3. What would be the net effect on the economy if government expenditures were temporarily increased after the hurricane?

4. Are there any circumstances when this course of action would make sense?