Economic Equilibrium

To understand the role of technology in the growth of the country A's economy (using neoclassical growth theory assumptions), the following table was developed to show the increased productivity of country A's farmers using disease resistant grains. Assume new disease resistant grain technology was introduced into the country A's farm economy at Point A.

Economic Equilibrium

Point	A	B	C
Target rate of return	10%	12%	12%
Real interest rate	10%	13%	12%

---

[Question]
Based on the neoclassical growth model, indicate at what point the country A's farmers would find economic equilibrium after the introduction of disease resistant grains.

A. Point A.
B. Point B.
C. Point C.

---

Answer: C

Equilibrium in the neoclassical model occurs when the target rate of return equals the real interest rates equal the target interest rates.

Target rate of return = Real interest rates = Target interest rates

• Real interest rates are those rates achieved in the market
• Target interest rates are those rates of return the investor wishes to earn.

Equilibrium occurs at Point A and at Point C. However, as a result of adding disease resistant grain to the country A's farmers, these farmers are operating on a higher productivity curve than the original Point A. At Point B, the real interest rate is higher than the target interest rate, inducting more capital to be invested. At Point C, the target rate of interest is equal to the real rate of interest, creating an equilibrium.