Question

If a country experienced a natural disaster which wiped out a quarter of its capital stock, what would happen in the long run to its potential GDP?

Answer 1

the options are missing:

a) It would at first fall dramatically and remain below its pre-disaster level indefinitely.

b) The capital stock would remain unaffected and continue on as usual.

c) It would fall in the short-term and then rise back to pre-disaster levels in the long-term.

the correct answer is: c) It would fall in the short-term and then rise back to pre-disaster levels in the long-term.

Step-by-step explanation:

When a severe natural disaster hits a country or a region, large portions of its capital stock might be negatively affected, e.g. an earthquake and tsunami hit Japan in 2011 and halted most of the factories in the affected regions. This negative effect lasted for more than 6 months and many car factories couldn't produce normally for almost a year. That included factories in the US and other countries that used Japanese components. But after a year or so, production levels were almost back to normal.