Question: A change in the capital stock Assume a one-time decrease in the capital stock, K, possibly caused by a natural disaster or an act Kof

A change in the capital stock Assume a one-time decrease in the capital stock, K, possibly caused by a natural disaster or an act Kof war. Assume that population does not change.

a Use a variant of Figure 9.7 to determine the eects on the market for capital services.

What happens to the real rental price, R/P?

What happens to the interest rate, i?

b Use a variant of Figure 9.13 to determine the eects on the labour market. What happens to labour input, L, and the real wage rate, w/P?

c What happens to output, Y, and consumption, C? What happens to investment, I? What happens over time to the stock of capital, K?

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