Question

How could war stimulate the economy? Explain in detail, making sure to mention the impact government purchases have on Gross Domestic Product (GDP). Also, make sure you make mention of how government purchases affect the private sector. Finally, describe how government purchases, in your opinion, have helped to stimulate or hinder the U.S. economy.

Answer 1

It can stimulate the economy only in the short-term, thru job creation & producing a massive amount of products to back warfare. But, such enormous short-run stimulation won't be persistent & will do more damage than good after the war ends.

Governmental spending plays a chief role in Keynesian economic concept, which deems them as a main instrument for regulation of the the business cycle. As per this concept, governmental spending boosts AD not only by directly generating demand – when the government procures the inputs to construct a bridge, for instance – but by putting funds in the pockets of uppliers & labourers , who themselves go on to spend it on commodities. This outcome is called the multiplier effect.

Yes, increases in governmental spending can stimulate the private sector investment. Generally, “the estimates reveal that one dollar of governmental spending raises capital investment by about seven cents .” Furthermore, in the case of big federal contracts, ‘the impact on investment increases to around 12 cents . Federal contracts aid firms by ‘easing companies’ access to external borrowing .

A stark pick-up in governmental expenditure, particularly in defence, has aided fuel a wide acceleration in American economic growth. The economy has expanded at a 3.0 per cent rate p.a since April of 2017.