The intertemporal substitution effect of a change in the price level results from a
A) change in the price of foreign goods relative to domestic goods.
B) change in the purchasing power of wealth.
C) change in the price of current goods relative to future goods.
D) Both answers B and C are correct.

Question

Quizplus · Accepted Answer

The intertemporal substitution effect refers to the tendency of consumers to increase their consumption of either current goods or future goods in response to changes in the relative prices of those goods. A change in the price level affects the price of current goods relative to future goods, making one type of consumption relatively less expensive than the other. Therefore, choice C is correct. Choice A is incorrect because it confuses the intertemporal substitution effect with the international substitution effect. Choice B is partially correct, as a change in the price level does affect purchasing power of wealth, but this does not directly relate to the intertemporal substitution effect.

The Intertemporal Substitution Effect of a Change in the Price