If the intertemporal substitution hypothesis is correct, then
A) the unemployment rate is always artificially high.
B) the unemployment rate is always artificially low.
C) discouraged workers should be included in the unemployed population because they actually want a job at the going wage.
D) discouraged workers should not be included in the unemployed population because they are optimally choosing more leisure during a time of low wages.
E) discouraged workers will not exist.

Question

Quizplus · Accepted Answer

The intertemporal substitution hypothesis suggests that individuals choose between work and leisure at different times based on the wage rate. If wages are low, individuals may opt for more leisure, implying that discouraged workers, who have stopped looking for work due to low wages, are making an optimal choice rather than being unable to find employment. This supports the idea that they should not be counted as unemployed.

If the Intertemporal Substitution Hypothesis Is Correct, Then