According to the intertemporal substitution effect, a higher price level
A) decreases the quantity of real GDP demanded.
B) lowers the costs of building new plants and equipment.
C) increases the quantity of real GDP demanded.
D) makes it less costly for people to buy houses and cars.

Question

Quizplus · Accepted Answer

The intertemporal substitution effect suggests that when the price level is higher, consumers will decrease their current spending in anticipation of lower prices in the future, thus decreasing the quantity of real GDP demanded.

According to the Intertemporal Substitution Effect, a Higher Price Level