According to the intertemporal substitution effect, a higher price level
A) makes it less costly for people to buy houses and cars.
B) decreases the quantity of real GDP demanded.
C) lowers the costs of building new plants and equipment.
D) increases the quantity of real GDP demanded.

Question

Quizplus · Accepted Answer

The intertemporal substitution effect suggests that as prices rise, consumers will delay purchases and save more in order to afford those purchases in the future when prices may be lower. This will lead to a decrease in the quantity of real GDP demanded. A, C, and D are incorrect because a higher price level does not make it less costly to buy houses and cars, lower the costs of building new plants and equipment, or increase the quantity of real GDP demanded.

According to the Intertemporal Substitution Effect, a Higher Price Level