Because of intertemporal substitution,the effect of a negative economic shock on real GDP will:
A) be larger than otherwise.
B) become a positive shock in the end.
C) disappear immediately.
D) occur only in the long run,but not during the short run.

Question

Quizplus · Accepted Answer

Intertemporal substitution refers to the ability of individuals to adjust their consumption and savings decisions over time in response to changes in economic conditions. A negative economic shock can lead to a decrease in consumption in the short run as individuals try to save more and reduce spending. However, in the long run, as individuals adjust their behavior and the economy adapts, this effect may be mitigated. Therefore, the effect of a negative economic shock on real GDP will be larger than otherwise due to intertemporal substitution in the short run.

Because of Intertemporal Substitution,the Effect of a Negative Economic Shock