A change in the capital stock
This question is an extended version of problem 7.x. Assume a one-time decrease in the capital stock, possibly caused by a natural disaster or an act of war. Assume that population does not change.
Use a variant of Figure 8.8 to determine the effects on the market for capital services. What happens to capital input, K , and the real rental price, R/P ? What happens to the interest rate, i ?
Use a variant of Figure 8.3 to determine the effects on the labor market. What happens to labor input, L , and the real wage rate, w/P ?
What happens to output, Y , and consumption, C ? What happens to investment, I ? What happens over time to the stock of capital, K ?