The Effects Of War On The Economy

1134 Words5 Pages
Answer 1 - From the text and research I have learned that war will stimulate the economy in the short term but will hurt in the long term since something will have to fund the war efforts and expenditures. War can be funded by increasing taxes, decreasing spending in other programs and Increasing the national debt. In recent times the war spending comes from increasing the national debt. This increased debt results in a higher debt-to-GDP ratio and higher interest rates. Government when it is too large hinders the growth of the private sector since the cost of the government exceeds its benefits. U.S. evidence from 1929-1986, an article in Public Choice estimated: "This analysis validates the classical supply-side paradigm and shows that maximum productivity growth occurs when government expenditures represent about 20% of GDP."1 A National Bureau of Economic Research paper stated: "A reduction by one percentage point in the ratio of primary spending over GDP leads to an increase in investment by 0.16 percentage points of GDP on impact, and a cumulative increase by 0.50 after two years and 0.80 percentage points of GDP after five years. The effect is particularly strong when the spending cut falls on government wages: in response to a cut in the public wage bill by 1 percent of GDP, the figures above become 0.51, 1.83 and 2.77 per cent respectively." 2

Answer 2 – I believe a wise combination of fiscal and monetary policy can have a positive effect on inflation and

More about The Effects Of War On The Economy

Open Document