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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 Samuelsons 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 Price LevelConsumptionInvestmentGov PurchasesExportsReal Expenditures 1986 billions 1604007510025600 14045010010050700 12050012510075800 1005501501001009000 806001751001251000 Samuelson 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 Price LevelConsumptionInvestmentGov PurchasesExportsReal Expenditures 1986 billions 16070075300-751000 140750100300-501100 120800125300-251200 10085015030001300 80900175300251400 A 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 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
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