Macroeconomics Essay

Student Name

Professor Albritton

Fall Semester 20__

“Republican Control of Congress could mean more military spending” and “Obama Asks GOP

Congress for Ebola Funds”: Article Review

Summary

With the newly voted republican government and war with ISIS, many believe military

spending will greatly increase. The president has already asked congress to approve additional

military funds for air strikes that would total $5.6 billion dollars (Hennigan). Since republicans

are commonly believed to increase military spending, it is believed to be put into effect as both

the houses and senate are controlled by republicans. For the 2014 budget, the Pentagon requested

$58.6 billion, which was less than the 2013 request, but now will greatly exceeded the original

request (Hennigan). Military contract companies are already benefiting from this increased

spending like Boing, which will be producing some of the drones being used (Hennigan). Now

with the Ebola crisis, many people expect government spending on health care equipment and

medical research will greatly increase.

The speaker of the house stated that President Obama has asked congress $4.64 billion

dollars to immediately control Ebola and $1.54 billion for contingency funding (Leonard).

Congress has not voted on passing the request, but it is believed the bill will be quickly passed. A

major part of the funding would be broken up into two parts. As set up, $2.43 billion would be

used by the Department of Health and Human Services, and the Center for Disease Control

would receive $1.83 billion (Leonard). Furthermore, 2,000 U.S. troops have been sent to West

Africa in hope to contain the disease. The CDC has also reported ordering $2.7 million worth of

medical supplies to fight Ebola.

Application

With the government spending (G) on military and medical supplies increasing, the

companies related to military and medical production would directly benefit by receiving the

money. With increased government spending on military and medical supplies, there is a

multiplier effect because those companies with directly related military and medical production

would need to buy more inputs for their products and this situation continues to be repeated with

other companies. If using the estimated U.S. GDP multiplier of 1.5 times the $10.24 billion, if

adding up the requested budget increases for military funding and Ebola aid; the result would be

increasing the U.S. GDP by $15.36 billion. The baseline of these two articles from an economic

view, is the fact that there is an increase of $10.24 billion in government spending. An increase

in Government spending, being fiscal policy, would cause a shift of the aggregated demand

curve to the right, as seen in diagram 1. This means price level will increase as well as GDP.

Assuming the U.S. is at equilibrium, with LRAS, SRAS and AD, increasing government

spending would create an inflationary gap, which can be seen in diagram 2. As seen, this

inflationary gap would increase the price level and increase real GDP. Ultimately the price level

increase is greater than the long run increase in GDP, and thus makes the gap inflationary.

The increase in government spending would also increase aggregate expenditure and raise

national income, seen in diagram 3 ($10.24 b x 1.5 = $15.36 b). One possible outcome of

increasing government spending on the military and medical aid is crowding out, which has also

been observed with other increase in government spending. Crowding out would occur because

increased government spending also creates higher interest rates, which would slow investment,

reduce consumption and lower net exports (the economy would expand by less than $15.36 b).

The result would be that the shift in AD would not be as big as initially assumed. In diagram 4,

the assumption is that the economy is below its potential GDP, and the increase in government

spending may not get the economy to LRAS because of crowding out. Basically there are can

be a few effects of increasing government spending. The first being an increase in price level and

real GDP. The next effect would create or increase an inflationary gap if the market is in

equilibrium or above equilibrium, or decrease disinflation if the market is below equilibrium.

Also, there is an increase in aggregate expenditure and national income, but crowding out occurs

in the short run.

The spending on military materials and medical materials to fight Ebola are not examples of

expansionary fiscal policy as the ultimate goal of this spending is not to expand the economy to

create jobs. The creation of additional economic activity through increase government spending

is a externality of the spending.

AD2 AD AS

PL

Real GDP

Diagram 1

Increase in aggregate Demand due to government spending

AD2 AD SRAS PL

Real GDP

Diagram 2

Inflationary gap due to government spending, increasing price level and real GDP

Inflationary gap

LRAS

View

Since the U.S. economy is still sluggish after the Great Recession, this government spending

could definitely help the economy. The economy is definitely below the potential GDP, so the

increase in government spending will help a little bit. The spending may also cause some job

growth, especially in the military and medical fields, and that is always beneficial to the

economy, but this is not the intention of the spending thus it cannot be classified as fiscal policy

(“Fix It”). The only downside to the increases in this government spending that personally

affects me is that price levels will increase. Obviously I don’t like prices of goods increases, but I

don’t mind a little price increase if the increase of government spending does not also create

bigger inflation, which could happen in this case. Another downside is that for a while, there

could be some crowding out, and that may affect what I do for investments. Overall the spending

on the military and medical aid help the economy and don’t drastically affect me. The increase in

spending is for good uses and I think that congress should approve the requests.

Bibliography

Hennigan, W. J. Republican Control of Congress could mean more military spending [Online

Article]. Accessed 08 November 2014; available from http://www.latimes.com/busine

ss/la-fi-defense-spending-2014108-story.html; Internet.

Leonard, Kimberly. Obama Asks GOP Congress for Ebola Funds. [Online Article]. Accessed 08

November 2014, available from http://www.usnews.com/news/articles/2014/11/07/

obama-asks-gop-congress-for-ebola-funds; Internet.

Word Count: 1,032

$10.24

$15.36