Technological advance increases the demand for capital, and increases the real interest rate. Now that the real interest rate exceeds the long-run target interest rate, people increase their saving and the stock of capital increase. Suppose that after a year, people have saved enough so that stock of capital to have increased from KS₀ to KS₁ as shown in the figure. After a year, the capital stock increases further, from $82,000 per person to $86,000 per person. Thus during this year more economic growth occurs as the capital stock increases!

The equilibrium real interest rate after the capital stock has increased is 5 percent a year. This real interest rate still exceeds the long-run target interest rate. Hence people continue to save so that the capital stock continues to grow and the supply of capital curve continues to shift rightward. In other words, still more economic growth lies ahead!

To see the additional economic growth, click on the figure below.