In this question we will reflect on the Australian fires from last year. A wide part of
Australia has experienced severe fires in the last year, which made the economy much
less productive and had severe impacts on business activities.
The fires in Australia can also be considered a decrease in the country’s stock
of capital. You may use the Solow model to show what happens when capital
decreases and what the model predicts for the new growth rate. Are these consequences likely to happen in practice? [10 marks]