Earthquake Destroys Capital
The question
A catastrophic earthquake in the economy of Verrin levels a large share of the nation's factories, machinery, and rail network, and most of what was lost will never be rebuilt. Show only the resulting change in the economy's productive capacity, holding the other curves fixed for this exercise. Show the effect on the AD-AS Model graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Earthquake Destroys Capital: the worked answer
On the AD-AS Model graph, LRAS shifts left.
Why LRAS shifts left
The capital stock is one of the resources that determine how much an economy can produce when all of its resources are fully employed. Permanently losing factories, machinery, and rail infrastructure lowers that full-employment level of output. On the AD-AS graph this is shown as a leftward shift of long-run aggregate supply, the vertical line marking potential output. Because the question asks only for the change in productive capacity, aggregate demand and short-run aggregate supply are held fixed for this exercise.
What happens to the equilibrium
Potential real GDP falls, so the economy's full-employment level of output is permanently lower.
The mistake students make on this one
Almost every student reaches for SRAS here, because a disaster sounds like it should raise costs. The prompt asks what the economy is now capable of producing, and capital that is permanently gone is a lost resource, which only LRAS records; an SRAS-only answer quietly claims the damage is temporary and that potential output is untouched.
On exam day
Put every disaster stem through one test: is the lost resource coming back? Permanent losses of labor, capital, or natural resources move LRAS, while temporary disruptions that leave the resources intact move SRAS.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when LRAS shifts left and every other curve on the AD-AS Model graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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