In his discussion of post-WWII growth in France, Blanchard describes the effects of destruction of part of a nation's capital stock. Suppose that instead of a decline in the capital stock a country experiences a decline in N resulting from a plague that leaves K intact. [Think of Stephen King's The Stand or, to be more historically accurate, think of the bubonic plague that killed 1/3 to 1/2 of the population of Europe during 1349-50.]
a) What is the immediate effect on K/N, Y/N, and Y? [increase, decrease, or unchanged]
b) Assuming that the economy was in a steady-state equilibrium before the plague and that the saving rate is unchanged after the plague, what happens in the post-plague period to Y/N and K/N (as these two variables return to their steady state equilibriums)? Explain and illustrate graphically.
c) This country could return to its steady-state equilibrium faster during the post-plague period by abandoning a portion of its capital stock. Would this be a sensible thing to do? Explain.
d) Suppose that N is rising at 1%/year and that the economy is in its steady-state equilibrium. What are the rates of change of Y and K in this steady-state equilibrium? Does this make sense if CRTS holds, and the APF is Y = F (K, N)?