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

Question

Quizplus · Accepted Answer

According to the intertemporal substitution effect, as the price level increases, people will opt to save more and consume less. This means that the quantity of real GDP demanded will decrease, as individuals adjust their spending patterns in response to the higher prices. Options A and D are incorrect, as a higher price level would not make it less costly to buy houses, cars, or build new plants and equipment. Option B is also incorrect since, as explained, the intertemporal substitution effect predicts a decrease in the quantity of real GDP demanded.

According to the Intertemporal Substitution Effect, a Higher Price Level