MidtermPracticeAnswers2 - CORNELL UNIVERSITY Professor...

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CORNELL UNIVERSITY Professor Levon Barseghyan Econ 314-1 First Mid-Term Exam The answers should be short and straight to the point. First provide the answer, and then briefly explain how you got this answer. 1. (30 points) A country with its economy at steady state experiences a civil war. Suppose that the war destroys 40% percent of the capital stock, and casualties reduce the labor force by 40%. According to the Solow growth model with no efficiency growth i. (3 points) What is the immediate impact on capital per person? NONE ii. (2 points) What is the immediate impact on total output and on output per person? TOTAL OUTPUT FALLS, OUTPUT PER PERSON DOES NOT CHANGE. iii. (10 points) Does it matter for the first two questions whether the country is at its steady state or not? NO IT DOES NOT. iv. (5 points) Assuming that the saving rate and depreciation rate are unchanged, what happens subsequently to output per worker in the postwar economy once the economy reaches its new steady state ?
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This note was uploaded on 10/12/2008 for the course ECON 314 taught by Professor Bar during the Fall '08 term at Cornell.

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MidtermPracticeAnswers2 - CORNELL UNIVERSITY Professor...

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