An economy with a long-run potential growth rate of 1% experiences a positive real economic shock that increases the growth rate to 2%.If intertemporal substitution subsequently takes place,what could the eventual new GDP growth rate be?
A) 0%
B) 1%
C) 2%
D) 3%

Question

Quizplus · Accepted Answer

Intertemporal substitution suggests that people may work more or invest more when returns are higher, potentially leading to a temporary increase in the growth rate beyond the initial shock, such as 3%.

An Economy with a Long-Run Potential Growth Rate of 1