In an economy with intertemporal substitution, an increase in government purchases

Question

Quizplus · Accepted Answer

In an economy with intertemporal substitution, an increase in government purchases increases current consumption and reduces current saving. This temporary increase in demand leads to an increase in real growth in the short run. However, in the long run, the reduction in saving limits investment, and the economy returns to the original position with no permanent effect on real growth. Therefore, option D, "increases real growth temporarily" is the best choice.

In an Economy with Intertemporal Substitution, an Increase in Government