Question

Suppose there are two very similar countries (call them E and F). Both countries have the same population and neither is experiencing population growth (that is, N is identical and constant in both countries). Both countries depreciate capital at the same rate, the both have the same savings rate, they both have the same technology, and there is no technological progress.

Suppose that currently both countries are in steady state, when an earthquake destroys half of the capital stock of Country E, and also kills half of its population. We would expect

A) That Country E's output per worker $LaTeX: \left(\frac{Y}{N}\right)$ (YN) will grow faster than Country F's only for some time.

B) That Country F's output per worker $LaTeX: \left(\frac{Y}{N}\right)$ (YN) will grow faster than Country E's only for some time.

C) That Country F's output (Y) will be higher than Country E's only for some time.

D)That Country F's output (Y) will be higher than Country E's permanently.

Answer 1

Please see the below answer.

C) That Country F’s output (Y) will be higher than Country E’s only for some time.

Explanation: As per the given information, the country E will take some time to recover from earthquake due to half of the lost capital stock and population. So, in the meanwhile, the country F had a good output and population to generate economy compare with E country. However, the growth of output for F country is only on a short term basis. So, the answer is (C) That Country F’s output (Y) will be higher than Country E’s only for some time.