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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...
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