Question

2. Two countries, country A and country B are identical in every meaningful way. Then there is a massive earthquake in country B that destroys much of the capital.

a. What will be the immediate effect on the level of output in country B according to our model?

b. What will be the effect on the growth rate of country B shortly after the earthquake according to our model?

c. What will happen to the levels of output and rates of growth of these two countries over time? (This question can be answered in one word. A couple sentences is fine but don’t write a novel!)

Answer 1

A)

The immediate impact will be that their output will fall.

B)

The growth rate of the country will plunge because of loss of the capital.

C)

The level of output for country B will rise along with growth over the time period because there is a large requirement of goods due to losses caused by the earthquake.

The will not be large changes in the growth and output of country A as they were unaffected by the earthquake.