Because of intertemporal substitution,a real shock has more of an effect on real GDP growth but less of an effect on inflation.

Question

Quizplus · Accepted Answer

Intertemporal substitution refers to consumers and businesses adjusting their consumption and production decisions based on changes in relative prices over time. A real shock, such as an increase in oil prices, can lead to higher prices for goods and services in the short run, reducing real GDP growth. However, over time, consumers and businesses can adjust their behavior, such as driving less or investing in alternative energy sources, which reduces the impact of the shock on inflation. Therefore, a real shock has more of an effect on real GDP growth but less of an effect on inflation due to intertemporal substitution.

Because of Intertemporal Substitution,a Real Shock Has More of an Effect