Intertemporal substitution tends to magnify:
A) negative shocks only.
B) positive shocks only.
C) both negative and positive shocks.
D) neither negative nor positive shocks.

Question

Quizplus · Accepted Answer

Intertemporal substitution means that consumers can shift their consumption patterns between different time periods in response to changes in prices or income. This tends to magnify both negative and positive shocks because consumers will adjust their consumption in order to maximize their satisfaction or utility. For example, if the price of a good increases, consumers may choose to delay their purchase or substitute it with a cheaper alternative, which reduces demand in the short run. However, if consumers expect the price to continue to rise in the future, they may stock up on the good now, which increases demand in the short run and reduces it in the future. Similarly, if income increases, consumers may choose to delay their consumption of some goods (such as luxury items) in order to save for the future, while if income decreases, they may choose to consume more of some goods (such as necessities) in the present.

Intertemporal Substitution Tends to Magnify