(a) Using the appropriate graphs, consider the short run impact of a natural disaster that causes a sudden drop in the capital stock using a real intertemporal model with investment (i.e., the simple intertemporal model without money). Explain the impact on wages, interest rates and investment. Does the model provide an unambiguous prediction for the impact of the disaster on hours worked and short-term output? Why or why not? (b) Suppose we add a money market to this model. Is it possible to know the impact of the loss of capital following the natural disaster on the price level? Why or why not? (c) Assume that the economy's production function is Cobb Douglas so per- capita output is y = kº, where k is per-capita capital. Using the Solow growth model, explain the impact of the loss of capital on the growth rate of per- capita output in the years following the disaster. (d) Given your answers to (a) and (b), are wars and natural disasters something we should welcome because it might be good for the economy? Explain.

(a) Using the appropriate graphs, consider the short run impact of a natural disaster that causes a sudden drop in the capital stock using a real intertemporal model with investment (i.e., the simple intertemporal model without money). Explain the impact on wages, interest rates and investment. Does the model provide an unambiguous prediction for the impact of the disaster on hours worked and short-term output? Why or why not? (b) Suppose we add a money market to this model. Is it possible to know the impact of the loss of capital following the natural disaster on the price level? Why or why not? (c) Assume that the economy's production function is Cobb Douglas so per- capita output is y = kº, where k is per-capita capital. Using the Solow growth model, explain the impact of the loss of capital on the growth rate of per- capita output in the years following the disaster. (d) Given your answers to (a) and (b), are wars and natural disasters something we should welcome because it might be good for the economy? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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