Paul A. Samuelson

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Term Paper Title	Paul A. Samuelson
# of Words	2509
# of Pages (250 words per page double spaced)	10.04

Paul A. Samuelson

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:
Ų An increase in prices causes a drop in household assets, thus causing consumers to spend less.
Ų Increases in domestic prices reduce exports, which causes an increase in spending on imports.
Ų 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.
Price
Level     Consumption     Investment     Gov. Purchases     Exports     Real Expenditures
(1986 $ billions)
160     400     75     100     25     600
140     450     100     100     50     700
120     500     125     100     75     800
100     550     150     100     100     9000
80     600     175     100     125     1000

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
Level     Consumption     Investment     Gov. Purchases     Exports     Real Expenditures
(1986 $ billions)
160     700     75     300     -75     1000
140     750     100     300     -50     1100
120     800     125     300     -25     1200
100     850     150     300     0     1300
80     900     175     300     25     1400

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 consumption and imports.  If taxes increase, households have less money for domestic purchases.  Following is a chart that depicts a $200 b...

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