Question

Suppose that a country experiences destruction of part of its capital stock. Suppose also that the capital stock plays a role as collateral in credit contracts, so that the destruction of capital increases credit market frictions.
(a) Determine how the net effects on macroeconomic variables differ from what is depicted in Figure.
(b) Is there a government policy that can mitigate the effects of this capital destruction? What is it? Explain how it works.



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  • CreatedDecember 05, 2014
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