Real Business Cycle

Question 1

explain the optimality condition for labor supply

Answer 1

at the optimum the marginal cost of a unit of labor must equal the marginal benefit of the wage earned with that labor

Question 2

what is intertemporal substitution in labor supply

Answer 2

households supply labor in the periods it pays off the most. A relatively low real wage reduces labor suply in favor of times when the return to working is high. A relatively high real interest rate means that working today is worthwhile since the earned income can be saved with a return allowing to consume more goods and suffer less disutility from labor tomorrow.