ʺIntertemporal substitutionʺ in labor supply describes changes in labor supply in response to changes in

Question

Quizplus · Accepted Answer

Intertemporal substitution in labor supply refers to how individuals adjust their labor supply over time in response to changes in the opportunity cost of leisure. The real interest rate represents the opportunity cost of current consumption, including leisure time, relative to future consumption. As the real interest rate increases, the opportunity cost of leisure increases, and individuals may choose to work more to take advantage of the higher returns on savings. Therefore, changes in the real interest rate can affect intertemporal substitution in labor supply. Consumer demand for goods, personal tax rates, and investment spending may all have an impact on labor supply, but they are not directly related to intertemporal substitution.

ʺIntertemporal Substitutionʺ in Labor Supply Describes Changes in Labor Supply