World War II resulted in the destruction of much of the United Kingdom?s physical capital stock. Assuming the country was in steady-state equilibrium before the war and nothing else changed, what does the Solow Model predict about the years following World War II in the United Kingdom?

Question

Quizplus · Accepted Answer

The Solow Model predicts that after a destruction of physical capital, an economy will eventually return to its original steady-state equilibrium if all other factors (like technology, savings rate, and population growth) remain constant. This is because the model assumes diminishing returns to capital; thus, when the capital stock is low, investment leads to rapid growth until the original steady-state is restored.

World War II Resulted in the Destruction of Much of the United