 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.

A $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.

The first edition was dominated by the end-of-the-war worry that widespread unemployment would return while later editions put growing stress on fiscal and monetary controls over inflation. In the later editions Samuelson has worked toward what he calls a 'neoclassical synthesis' of ancient and modern economic findings. In short, his synthesis is that nations today can successfully control either depression or inflation by fiscal and monetary policies. It is the feeling of some economists that Samuelson's book is really his greatest contribution. It has gone a long way toward giving the world a common economic language" (Anonymous, bio.html).

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 real father of the neoconservatism movement (Anonymous bio.html).

80 600 175 100 125 1000

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:

Samuelson had a global impact in that he communicated with many politicians including President Kennedy. In one report to Kennedy, Professor Samuelson made certain minimal policy recommendations "that need to be pushed hard even if the current recession turns out to be one that can be reversed by next summer at the latest." He urged that there be strong support of pledged expenditure programs, including such things as increasing defense expenditures and foreign aid on a basis of merit and need. He also recommended pushing educational programs, high priority for urban renewal and health and welfare programs, highest priority on improving unemployment compensation, acceleration of useful public works and highway construction programs, help for depressed areas programs, and natural resource development projects (Anonymous bio.html).

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Approximate Word count = 2644
Approximate Pages = 11 (250 words per page double spaced)