People engage in intertemporal substitution because they

Question

Quizplus · Accepted Answer

Intertemporal substitution arises from rational decision-making where individuals seek to optimize their utility over time. They choose to allocate their consumption, savings, and labor supply decisions optimally over time, based on the fluctuations in the expected returns on these choices. This leads to intertemporal smoothing of consumption or savings, which allows individuals to maintain a constant level of welfare or utility over time. Option A is incorrect because intertemporal substitution is not related to increased work hours during economic expansions. Option C is correct but incomplete as consumption smoothing is a part of the rational decision-making process that leads to intertemporal substitution. Option D is incorrect as individuals do not engage in intertemporal substitution to cause income fluctuations.

People Engage in Intertemporal Substitution Because They