- Based on a number of factors, war could be good or bad for the economy. One primary example is the economic boom in the United States during World War II. As the United States entered the war overseas, the federal government had to designate more resources to the military. In the short-term, government purchases of goods and services increased almost five fold from 1939 to 1944. This huge expansion in aggregate demand almost doubled the economy's production of goods and services and led to a 20% increase in the price level. As a result, unemployment fell from 17% in 1939 to about 1% in 1944 which was the lowest recorded level in U.S history. On the opposite end, war could be negative on the economy in the long-term resulting in increased taxes and exhausted resources.
- The opportunity cost of using resources in wars is the decrease of government spending towards social programs, energy and environmental issues. In addition, the natual resources utilized to support the war take away from domestic consumption.
3. How would a war affect aggregate supply?
- A war would affect aggregate supply if suddenly some firms experience an increase in their costs of productions. For example, a war in the Middle East might interrupt the shipping of crude oil, thus driving up the cost of producing oil products. Crude oil is a key input into the production of many goods and services. U.S firms that produce gasoline, tires, and many other products experience rising costs, and they find it less profitable to supply their output of goods and services at any given price level. The result is a leftward shift in the aggregate-supply curve, which in turn leads to stagflation.
Adverse Shift in Aggregate Supply
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