Question

Assume that a war reduces a country's labor force but does not directly affect its capital stock. If the economy was in a steady state before the war and the saving rate does not change after the war, then, over time, capital per worker will ______ and output per worker will ________ as it returns to the steady rate

a) decline, increase

b) increase, increase

c) decline, decrease

d) increase, decrease

Please explain why

Answer 1

Option C.

• The capital per worker will decline and output per worker will decrease as it returns to the steady state.
• Steady state of an economy refers to that period of time when the Economy is stable and the capital and the population size remains constant.
• When the saving rate is constant, the capital stock depreciates and hence there is a higher return on capital.
• We kmok that a Higher return on capital is associated with a decline in capital per worker which in turn decreases the output per worker.