If a natural disaster destroys a large portion of a country's capital stock but the saving and depreciation rates are unchanged, the Solow model predicts that the economy will grow and eventually reach:
A) the same steady-state level of output as it would have before the disaster
B) a higher steady-state level of output than it would have before the disaster
C) a lower steady-state level of output than it would have before the disaster
D) Not enough information is given.
E) None of these answers are correct.

Question

Quizplus · Accepted Answer

In the Solow model, the steady-state level of output depends on the savings rate, depreciation rate, and the level of technology. The natural disaster may temporarily disrupt the economy and reduce the level of output, but over time, the economy will return to its steady-state level of output as long as the savings and depreciation rates remain unchanged. Therefore, the economy will eventually reach the same steady-state level of output as it would have before the disaster.

If a Natural Disaster Destroys a Large Portion of a Country's