For a given increase in government spending growth,intertemporal substitution is more widespread when the impact of AD growth on:
A) both inflation and real GDP growth is stronger.
B) both inflation and real GDP growth is weaker.
C) inflation is stronger and the impact of the AD growth on real GDP growth is weaker.
D) inflation is weaker and the impact of AD growth on real GDP growth is stronger.

Question

Quizplus · Accepted Answer

Intertemporal substitution is more widespread when individuals expect their real income to be higher in the future, encouraging them to spend more now. This is more likely when the impact of aggregate demand (AD) growth on real GDP is stronger (indicating robust economic growth) and the impact on inflation is weaker (suggesting stable prices), as in option D. This scenario implies that people anticipate better economic conditions ahead without the deterrent of high inflation, making them more willing to substitute future consumption for present consumption.

For a Given Increase in Government Spending Growth,intertemporal Substitution Is