Which of the following explains why intertemporal substitution magnifies a negative economic shock?
A) When things go bad,the return to work and investing fall,and often people work less and invest less.
B) When things go well,workers will tend to be less productive and invest less.
C) When things go bad,people often work more and harder to maintain their return to work.
D) When things go well,the return to work and investing rise,and often people work less and invest less.

Question

Quizplus · Accepted Answer

When there is a negative economic shock, the return to work and investing fall. This reduces the incentive for people to work and invest, leading to a decrease in labor supply and investment. Intertemporal substitution magnifies this effect as people tend to substitute leisure for work and consumption for investment in response to the lower return, further reducing labor supply and investment.

Which of the Following Explains Why Intertemporal Substitution Magnifies a Negative