Question from Past Macroeconomics Qualifying Exam (Spring, 2005 - Question three) at George Mason UniversityEdit
Suppose that tsunamis arising in the Pacific and the Atlantic Oceans simultaneously visit Hawaii, the Pacific Northwest and the Atlantic North East of the United States, killing millions of individuals and destroying large tracts of physical capital, especially in Honolulu, Seattle, San Francisco, Los Angeles, Boston and New York. Suppose further that foreign aid to the United States in response to this tragedy is ‘stingy’. Trace out the likely immediate market responses to such an event in the absence of any specific macroeconomic response. What macroeconomic policy should the US government pursue (assume that Washington DC is spared the tragedy) in such circumstances and why? Be careful to specify the economic models that you deploy.