According to the intertemporal substitution effect, a fall in the price level will
A) decrease the real value of wealth, which increases the quantity of real GDP demanded.
B) cause the interest rate to fall so that investment increases and the quantity of real GDP demanded increases.
C) increase net exports, which causes the quantity of real GDP demanded to increase.
D) increase the real value of wealth, which raises the interest rate so that the quantity of real GDP demanded decreases.

Question

Quizplus · Accepted Answer

The intertemporal substitution effect suggests that a fall in the price level leads to lower interest rates, which in turn encourages more investment. This increase in investment boosts the quantity of real GDP demanded.

According to the Intertemporal Substitution Effect, a Fall in the Price