QUESTION:

On October 8, 2005, a magnitude 7.6 earthquake shook the Kashmir region and destroy much of its capital stock. Use the saving-investment diagram to analyze the effects on national saving, investment, and the real interest rate. Explain your reasoning.

a)What effect will the loss of capital have on expected future marginal product of capital, desired capital stock, desired investment?

b)The effects on desired national saving of the earthquake losses are ambiguous. Give one reason for desired saving to rise and one reason for it to fall.

c) Assume that desired saving doesn't change. What effect does the loss of capital have on the country's real interest rate and the quantity of investment?