"Intertemporal substitution" in real business cycle theory refers to the change in the ________ as a result of the change in the real interest rate.
A)personal tax rate
B)demand for loanable funds
C)supply of labour
D)consumer demand for goods
E)demand for labour

Question

Quizplus · Accepted Answer

Intertemporal substitution refers to the decision by individuals to adjust their consumption and labor supply over time in response to changes in the real interest rate. As the real interest rate increases, individuals will tend to save more, which will reduce their current consumption and increase their supply of labor. This is because the higher real interest rate increases the return to saving, making it more attractive to postpone consumption and work more in the present period. Therefore, the correct choice is C, supply of labor.

"Intertemporal Substitution" in Real Business Cycle Theory Refers to the Change