Suppose that an economy is growing at its steady state rate of 4% per year when a natural disaster destroys one-quarter of its capital stock, leaving all other factors of production unchanged.
a. What will be the immediate effect on the capital–labor ratio and real GDP per hour worked?
b. After the disaster, will the economy grow at the same 4% rate in the short run? Explain.
c. What will be the long-run growth rate of the economy?