Question

8. Endogenous Growth Model In the endogenous growth model, suppose that the efficiency with which human capital is accumulated falls. What happens in the short run and the long run to consumption in this country?

Answer 1

In endogenous growth model, human capital is the most important source of development. According to this theory as humans get development, they develop new innovations, new technology, and more effective way of production. In short run the production will reduce and due to that the price of existing commodities will go up, which would in turn decrease the demand for those commodities as well.

But,in long run, due to decrease in demand, investment in human capital will increase so as to increase productivity and equilibrium would again be achieved.