How Does Total Spending Affect The Economy

In the event that prices decrease in the economy, regardless of the cause, total spending will increase. Total spending is made up of the spending by consumers, investment spending, the government’s spending, and net exports. According to the law of demand, if everything else remains constant, but the price of a good or service decreases, consumers are likely to buy more of that good or service. Also as prices decrease the value of the wealth consumers have increases, so consumers are able to buy more with the same amount of income. Assuming the prices did not decrease so much as to make up for the increase in the quantity consumed, the decrease in prices would cause an increase in the consumption portion of total spending. Lower price level also leads to more investment spending because as price
So, as prices decrease, the investment spending portion of total spending increases. Net exports, the value of exported goods and services minus the value of imported goods and services, increases as a result of a lower price level. Again, because of the law of demand, as prices decrease, foreign consumers of our goods and services buy more. The amount spent on imports is relatively unaffected by an decrease in prices because while lower prices leave us with more disposable income to spend on imports, some consumers will use that leftover income to purchase domestic goods/services that they perceive as superior to foreign goods/services. So with an increase in exports and no significant change in imports, the net exports portion of total spending increases as prices decrease. There is little change in the amount the government spends as a result of lower prices because government spending is relatively fixed. Overall, with an increase in consumption, investment spending, and net exports, total spending increases as prices decrease. Along with these changes in total spending, lower price levels with cause an increase in output demanded, as