components have taken place, the real expenditures will increase by $400 billion at each price level. Samuelson also used this model to demonstrate the effect changes in tax amounts could have. Taxes are not one of the components of the aggregate demand formula, but they do impact consumption and imports. If taxes increase, households have less money for domestic purchases. Following is a chart that depicts a $200 billion increase in taxes:PriceLevelConsumptionInvestmentGov. PurchasesExportsReal Expenditures(1986 $ billions)1601007510012540014015010010015050012020012510017560010025015010020070080300175100225800A $200 billion increase in taxes would therefore result in a decrease in consumption and an increase in exports. The real expenditures would then be $200 billion less in each price level.This model was once the standard for forecasting these types of adjustments. It has been criticized, however, for not including any of the indirect ways in which government spending and taxes can affect the economy. The model still has relevance when examining how the government can provide stabilization to the overall economy.FREE MARKET CAPITALISM In his book Foundations of the Free Market System, Paul Anthony Samuelson emphasized the importance of mathematics concepts in the study of economics. Samuelson was also swept up in the Keynesian revolution. The Nobel prizewinner in economics in 1970, Samuelson considered it a "priceless advantage to have received a thorough grounding in classical economics" (Samuelson, PG).Samuelson, like Keynes, was a total conservative. He agreed that Keynes had two basic motivations, one of which was to destroy the labor unions and the other one was to maintain the free market. Samuelson seemingly went along with Keynes, whose whole idea was to have an impotent government that would do nothing but, through tax and spending policies, maintain the equilibrium of the free market. Keynes was known as the re...
