Question

In the previous problem sets, we have looked at the country of Florin. Suppose that FlorinBeing located in east-central Europe, Florin suffered because of in World War I. Florin

stayed neutral in The Great War, so the population (and labor force) was generally
unaffected. Suppose, however, that—owing to the shutdown of international trade
and access to resources from abroad—Florin has lost 20% of its capital stock as a result
of World War I. Describe the long-ru effects on k∗ and y∗ from the steady-state situation before the war.

Answer 1

The long-run effects of World War I on Florin's capital stock and output level would be a decrease in both due to the shutdown of international trade and loss of resources. Rebuilding the capital stock and recovery from the effects of the war is possible.

Step-by-step explanation:

The long-run effects of World War I on the country of Florin's capital stock (k∗) and output level (y∗) can be described as follows:

Due to the shutdown of international trade and access to resources, Florin lost 20% of its capital stock as a result of the war. This decrease in capital stock would lead to a decrease in the steady-state capital stock (k∗) and the steady-state output level (y∗). The exact impact on k∗ and y∗ would depend on the specific characteristics of Florin's economy, such as its saving and investment rates.

In general, a loss of capital stock would result in a lower level of productivity and output in the long run. This can be seen in other countries that have experienced similar disruptions to their capital stock, such as Germany after World War I. However, with proper investments and policies, it is possible for Florin to rebuild its capital stock and recover from the effects of the war.