"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)demand for labour
B)demand for loanable funds
C)consumer demand for goods
D)personal tax rate
E)supply of labour

Question

Quizplus · Accepted Answer

Intertemporal substitution in real business cycle theory refers to the idea that individuals may choose to adjust the amount of labour they supply in response to changes in the real interest rate. Specifically, when the real interest rate increases, individuals may choose to work more in order to take advantage of the higher return on savings, whereas when the real interest rate decreases, individuals may choose to work less and consume more in the present. Therefore, the change in the real interest rate affects the supply of labour, making E the correct answer.

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