Assume that a war reduces a country's labor force but does not directly affect its capital stock. If the economy was in a steady state before the war and the saving rate does not change after the war, then, over time, capital per worker will ______ and output per worker will ______ as it returns to the steady state.

Question

Quizplus · Accepted Answer

In a steady state, the capital stock and the labor force grow at the same rate. If the labor force declines due to a war, the capital stock will not adjust immediately, leading to a decrease in capital per worker. As the economy returns to the steady state, capital per worker will continue to decline until it reaches the new steady state level. With a constant saving rate, there is no increase in investment that could offset this decline in capital per worker. Therefore, output per worker will also decrease as a result.

Assume That a War Reduces a Country's Labor Force but Does