Question

10. Consider a one-period economy which experiences the destruction of some of the nation’s capital stock (say through a hurricane is destroyed). How should this effect equilibrium, consumption, output and labor supply? Now, let’s say the government tries to offset some of the declines in capital on output and hours worked by increasing government spending. What is the likely outcome of this policy intervention in terms of consumption?

Answer 1

After a natural disaster like hurricane,the productivity of the country gets destroyed.Natural disasters are bad for the economy.They destroy tangible assets and human capital and there is less productivity.The indirect effect of natural disasters is reduced economic output and growth especially in low income countries as consumption is less .Labor supply is less as there is loss of human capital .However in US , growth has not been affected much due to natural disasters.

There will be increased investment in assets and increased labor supply.Increased investment in assets will create more employment and consumption will increase . This will lead to increase in aggregate demand and the economy will grow.