Question

Suppose, due to the effects of a military conflict that has ended, that a country experiences a large reduction in its capital stock. Assume no other effects of this event on the economy. Which of the following will tend to occur as the economy adjusts to this situation?
a) a relatively low growth rate for some time
b) positive growth, followed by negative growth, and then zero growth
c) a relative high growth rate for some time
d) zero growth for some time, followed by a gradually increasing growth rate
e) none of the above

Answer 1

Answer:

The correct answer is the option A: a relatively low growth rate for some time.

Explanation:

To begin with, in the situation where a country is facing a large reduction in its capital stock then the most common that could tend to happen is that there will be a relatively low growth rate for some time due to the fact that in economics terms the capital stocks are refered to the shares that represent the ownership of the companies and if in an economy there are few of them that means that the companies are not working well and therefore there is low productivity in general in the country that would impact badly in the future and the growth rate will relatively low until the capital stock starts increasing and the companies start to produce more for the economy.