Impact of Capital Deepening on Economic Growth

Very Hard Economic Growth And Development Capital Deepening

In an economy experiencing capital deepening, the government has launched several initiatives aimed at increasing the investment in physical and technological capital. A researcher published a paper stating that capital deepening could lead to higher productivity and economic growth by allowing workers to use more sophisticated tools and machinery. However, some economists argue that the benefits of capital deepening are limited by factors such as labor supply constraints and diminishing returns to capital.

Considering these discussions about capital deepening, which of the following statements is most likely to be correct regarding its effect on economic growth?

Capital deepening invariably leads to sustained economic growth without considering labor market conditions.

While capital deepening can enhance productivity, its overall effect on economic growth is contingent upon complementary labor inputs.

Capital deepening primarily affects short-term economic fluctuations and has little to no impact on long-term growth trajectories.

Hint

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