Question

If a war destroys a large portion of a country's capital stock but the saving rate is unchanged, the Solow model predicts that output will grow and that the new steady state will approach: O the same level of output per person as before. O a higher level of output per person than before. O a lower level of output per person than before. O the Golden Rule level of output per person. Exhibit: Steady-State Consumption II Sk* Sk* f** - Ek Reference: Ref 8-1 (Exhibit: Steady-State Consumption II) The Golden Rule level of steady-state consumption per worker is: O AC. OBC. O DE OAB.

Answer 1

1. If the saving rate is unchanged and there is a decrease in the country's capital due to war will increase the output but at the new steady-state the output per worker will be same as before.

Answer: Option (A). i.e., the same level of output per person as before.

2. The golden rule level of steady-state occurs where the gap between the production function and line of $\delta \kappa$ is maximum. In other words when the MPK (slope of production function) and $\delta$ (slope of $\delta \kappa$ line) is equal.

Hence, the golden rule level of steady-state capital per worker is represented by point C, consumption per worker is represented by AB and investment per worker is represented by BC.

Answer: Option (D).