Based on the Solow model,an earthquake that destroys half the capital stock in a country will increase growth in the years following the disaster.

Question

Quizplus · Accepted Answer

The Solow model predicts that a reduction in capital stock leads to an increase in the marginal product of capital, which can result in higher growth rates in the short run. This is known as the "diminishing returns to capital" effect. Therefore, an earthquake that destroys half the capital stock may lead to a temporary increase in economic growth in the years following the disaster, as the remaining capital becomes more productive. However, in the long run, the reduction in capital stock will lower the economy's potential output, which can have negative effects on growth rates.

Based on the Solow Model,an Earthquake That Destroys Half the Capital