BIG ISSUES OF ECONOMIC CONCERN Samuelson has offered the world many economic theories. One area he is widely known for is his views on the spending multiplier. Samuelson has presented a way through his aggregate demand model to demonstrate how the spending multiplier affects individual types of spending. There are several components of aggregate demand. The basis for understanding this model is as follows: An increase in prices causes a drop in household assets, thus causing consumers to spend less. Increases in domestic prices reduce exports, which causes an increase in spending on imports. The interest rate effect is when prices increase, as does the demand for money, thus increasing the interest rate. This forces a downward pressure on investment and purchases of durable goods.Therefore, investment, exports and consumption are all inversely related to pricing. In Samuelson’s model, government spending was the only constant. This means the government will always buy the same amount of goods no matter what the price.The aggregate demand schedule is therefore, the sum of consumption, investment, government purchases and exports. The chart below depicts the aggregate demand schedule.PriceLevelConsumptionInvestmentGov. PurchasesExportsReal Expenditures(1986 $ billions)160400751002560014045010010050700120500125100758001005501501001009000806001751001251000Samuelson used this model to demonstrate how changes in these components would impact real expenditures. For example, the chart below shows the results if the government increased its purchases by $200 billion.PriceLevelConsumptionInvestmentGov. PurchasesExportsReal Expenditures(1986 $ billions)16070075300-751000140750100300-501100120800125300-2512001008501503000130080900175300251400A $200 billion rise in government purchases leads to a $300 billion increase in consumption. It will also reduce exports by $100 billion. When the total changes in the...
