Question

Suppose a major hurricane hits the eastern coast of Florida and only destroys significant amounts of physical capital. All else the same, real gross domestic product (GDP) will ________ in the short run, and real GDP will ________ in the long run. Group of answer choices decline; be permanently lower decline; end up higher than the original level decline; return to the steady state level increase; decrease be unchanged; decline

Answer 1

Answer: decline; return to the steady state level

Step-by-step explanation:

Physical capital can help in the production of goods and services. If a significant amount was to be destroyed, this would mean less production of goods. This will therefore lead to a decline in the GDP in the Short run.

In the long run however, the real GDP will return to a steady state where the GDP will become the potential GDP as a result of the physical capital has either been replaced or rebuilt in the future thereby leading to the production level which will increase.