Question

Notice this is a multiple answers question. Suppose there are two very similar countries (call them G and H). Both countries have the same population and both are experiencing population growth at the same rate (that is, N and    are identical 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 technological progress happens at the same rate in both countries.

Suppose that currently both countries are in steady state, when an earthquake hits both countris. In country G it destroys half of the capital stock, but does not kill any of its population. In country H it kills half of the population, but it does not affect the country's capital stock. We would expect

Group of answer choices

That Country G will experience a period of increase in capital per effective worker (KAN)(KAN).

That Country H will experience a period of increase in capital per effective worker (KAN)(KAN).

That Country H will experience a period of decrease in capital per effective worker (KAN)(KAN).

That Country G will experience a period of decrease in capital per effective worker (KAN)(KAN).

Answer 1

As there is no population growth in both the countries and everything else is same. After earthquake country G ‘s capital stock is reduced to half and the population remains the same. On the other hand the earthquake destroys H's half population but the capital stock remains the same.

We can say that the population of H will never rise and will always be half of country G. And as the technology used in both countries is also same and there are no technological progress, we can conclude that country G’s output will always be less than the output of country H.

So (D) is the correct option

That Country G will experience a period of decrease in capital per effective worker (KAN)(KAN).

The capital stock is reduced in country G due to earthquake, which in turn will decrease the capital available to per effective worker.

Hope you got the answer.

Thanks!