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Mathematics & Economics
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English (U.S.)
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Topic:

Long-Run Impacts of the Recent Earthquake in Morocco

Coursework Instructions:

This question theorizes what the long-run and very long-run impacts might be of the recent earthquake in Morocco. Suppose Morocco is hit with a terrible earthquake that kills 1% of the population and destroys 2% of the capital stock. Prior to the earthquake Morocco had a population growth rate of 1%, a rate of labour augmenting technological change of 1%, an 8% depreciation rate and it saved 25% of its income. Note: You should assume that Morocco was in its golden rule steady state prior to the earthquake.
a) Describe in words and with the aid of one Solow model diagram what the impact of this shock would be on the long-run equilibrium for Morocco. That is, describe in words what happens to the long-run equilibrium per effective worker levels of real output, consumption, investment, capital. What happens to the long-run equilibrium real rental price of capital. (9 points)
b) Describe in words and with the aid of one Solow model diagram what the impact of this shock would be on the very long-run equilibrium (steady state) for Morocco. That is, describe in words what happens to the steady state per effective worker levels of real output, consumption, investment, capital. What happens to the long-run equilibrium real rental price of capital. (9 points)
c) How would your answers to parts A & B change, if at all, if we also noted that one impact of the earthquake was to damage (weaken) a large portion of the capital stock and that this resulted in a doubling of the depreciation rate of capital. Would the new steady state still be the golden rule steady state? (7 marks)

Coursework Sample Content Preview:


Macroeconomic Theory
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Institution
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Macroeconomic Theory
Impact on the Long-Run Equilibrium
The earthquake caused a short-term decline in Morocco's populace and capital stock. The population is reduced by 1%, and the capital stock is decreased by 2% due to the shock. Since Morocco was originally in its steady state according to the golden rule, the shock upsets the equilibrium. The economy abruptly deviates from its steady-state trajectory when population size and capital stock are reduced. Morocco eventually begins its recovery process. The populace is gradually recovering over time as the growth rate of the population stays at one percent. The capital stock, however, takes longer to bounce back because investments are required to replace the lost capital. A decrease in the capital-to-labor ratio due to the initial shock results in a brief drop in real production per effective worker. Due to the smaller capital stock, the real rental price of the 

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