Question

We are in the dark middle ages. The country of Tallyland is perfectly described by the basic Neoclassical Growth Model with no technological progress. The population and labor force grow at a constant rate n, households save a constant fraction s of their income. Assume that the country has reached its steady state. Now the Black Death hits, and half of the labor force is wiped out. However, the population growth rate, saving rate, and depreciation rate are unaffected. Also all the capital stock remains intact.

1. How does the capital stock per worker change in short-run in Tallyland, due to the arrival of the Black Death?

2. Draw the Solow diagram and describe, with the help of the diagram, what happens to the capital stock per worker over time. How does the steady state after the Black Death compare to the steady state before the Black Death.?

Answer 1