Real business cycle economists claim that the intertemporal substitution effect

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Real business cycle economists claim that the intertemporal substitution effect plays a significant role in the economy, and it depends on the real interest rate. This effect refers to how individuals make decisions about when to consume, save, or work based on their expectations of future economic conditions. Specifically, when real interest rates are high, individuals are more likely to save and work more today to take advantage of the higher returns, leading to an increase in output and employment. Conversely, when real interest rates are low, individuals are more likely to consume and work less to enjoy the lower borrowing costs, leading to a decrease in output and employment.

Real Business Cycle Economists Claim That the Intertemporal Substitution Effect