Question
This question theorizes what the long-run and very long-run impacts might be of the recent earthquake in Morocco. Suppose Morocco is hit with a terrible
This question theorizes what the long-run and very long-run impacts might be of the recent earthquake in Morocco. Suppose Morocco is hit with a terrible earthquake that kills 1% of the population and destroys 2% of the capital stock. Prior to the earthquake Morocco had a population growth rate of 1%, a rate of labour augmenting technological change of 1%, an 8% depreciation rate and it saved 25% of its income. Note: You should assume that Morocco was in its golden rule steady state prior to the earthquake. a) Describe in words and with the aid of one Solow model diagram what the impact of this shock would be on the long-run equilibrium for Morocco. That is, describe in words what happens to the long-run equilibrium per effective worker levels of real output, consumption, investment, capital. What happens to the long-run equilibrium real rental price of capital. b) Describe in words and with the aid of one Solow model diagram what the impact of this shock would be on the very long-run equilibrium (steady state) for Morocco. That is, describe in words what happens to the steady state per effective worker levels of real output, consumption, investment, capital.
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