If a natural disaster destroys a large portion of a country's capital stock but the saving and depreciation rates are unchanged, the Solow model predicts that the economy will grow and eventually reach:
A) the same steady-state level of output as it would have before the disaster.
B) a higher steady-state level of output than it would have before the disaster.
C) a lower steady-state level of output than it would have before the disaster.
D) Not enough information is given.
E) None of these answers is correct.

Question

Quizplus · Accepted Answer

The Solow model predicts that the economy will experience a temporary drop in output, but it will eventually return to its previous steady-state level of output because the saving and depreciation rates are unchanged. The capital stock will be rebuilt over time, and once it reaches its previous level, the economy will reach the same steady-state level of output as it would have before the disaster.

If a Natural Disaster Destroys a Large Portion of a Country's