Answer to Question #130814 in Macroeconomics for ali

Question

A country losses much of its capital stock to a war

a) what effect should this event have on the country's current employment, output,and real angle

b)what effect will the loss of capital have on desired investment?

c) the effect war time losses are ambiguous. given one reason for desired saving to rise and one reason for it to fall

Answer 1

Solution:

a.). When a country loses much of its capital stock to war, the level of capital stock is subsequently reduced in the country. This reduction of capital stock results to lower marginal productivity of labor, which is characterized by the labor demand curve shift to the left. This will, therefore, cause the demand for labor to reduce as well the employment. The labor output will also decrease due to low employment levels. There will also be a reduction in wage rates for employees during this period.

b.). Since the capital stock is lower, this will increase the marginal product of capital, and as a result, the desired investment will increase.

c.). When the current output decreases, desired savings will reduce since people will not want to reduce their consumption. In contrast, because future output will also be lower, people will desire to save more today to make up for the loss of future income.