Question

If a war destroys a large portion of a country's capital stock but the saving rate is unchanged, the Solow model predicts that output will grow and that the new steady-state will approach:

A) a higher level of output per person than before.
B) the same level of output per person as before.
C) a lower level of output per person than before.
D) the Golden Rule level of output per person.

Answer 1

B) the same level of output per person as before.

Step-by-step explanation:

In the Solow growth model, the economy reaches a steady state level of capital regardless of the starting level of capital. This steady state occurs when capital per worker is constant. Therefore after the war, the level of output should return to its normal level since the savings rate is constant and hasn't changed. This model assumes that a constant fraction of capital will always wear out, increasing the capital-labor ratio, therefore the population must grow or new technologies must be introduced to reach the steady state.