Suppose that a nation becomes involved in a war that results in the destruction of a significant fraction of its capital stock.

Suppose that a nation becomes involved in a war that results in the destruction of a significant fraction of its capital stock. Use the classical model to predict the effects this would have on a) real GDP; b) economic growth; c) equilibrium real wage; d) equilibrium employment

Expert Solution

As a result of war , the capital stock and the infrastructure of the economy will be greatly destroyed. This will also lead to the loss of manpower. As a result of this , the Aggregate supply of the nation will suffer. There will be decrease in AS due to lesser capital stock and infrasture. Real GDP will then fall and hence economic growth will also fall. Due to lesser supply in the economy , the demand for the labor will fall leading to lesser employment or rise of unemployment in the economy. This will lead to the drop in the equilibrium wages due to lesser demand for labor resulting from decreased supply.

Rahul Sunny answered 2 years ago

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