In the chapter, we discussed how intertemporal substitution can amplify a boom by causing people to work more and by causing more people to work (while the reverse is true in a recession). Capital is also subject to intertemporal substitution. For example, it’s possible to run a factory at close to capacity in one period, while putting off maintenance to a later period. How do you think capacity utilization varies across the business cycle? Is capacity utilization procyclical (varies positively with GDP) or countercyclical (varies negatively with GDP)?
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