Question

"The US government decides to lower military expenditures to reduce the budget deficit.What effect would you expect this shock to have on output and inflation in the short-run"?

Answer 1

Answer:

A decrease in military investment by the government, with the aim of lowering public spending, would in turn mean a decrease in aggregate demand, as less money would be inserted into society, which would reduce outputs and, due to the reduction in demand, it would also reduce inflation.

Public expenditure, in economy, indicates the complex of money of public origin that is used by the government in public goods and/or public services aimed at pursuing public purposes, such as military expenditures for national defense. These are therefore the outputs by the government and therefore an item of liabilities within the national budget, the coverage of which is necessarily entrusted to taxation on taxpaying citizens or public debt.  If public expenditure is not adequately covered by the revenue of a non-sovereign state (e.g. taxation), it enters a typical financial situation of public deficit.