Question

Most American history books point to World War II as a clear-cut example of beneficial expansionary fiscal policy in action. The U.S. economy was pulled out of the Great Depression by enormous governmental outlays for the war effort—or so the story goes. The actual situation was that the U.S. economy’s growth rate from 1933 to 1941 was already higher than any other recorded peacetime period of the same length. Moreover, the increase in military expenditures during World War II was not matched by a similar increase in total output. In fact, it looks as if the crowding-out effect was relatively large, at least larger than the history books indicate. This can be readily observed in terms of what happened to personal consumption expenditures. They dropped by 3.5 percent in real terms from 1941 and 1942, and did not rebound to

1941 levels until after 1944. In other words, the average American saw no real increase in living

standards during the war, in spite of massive military expenditures.

Given the information presented here, what could you say about the government’s spending multiplier during World War II?

Answer 1

The government's spending multiplier is nothing but the ratio between change in government's income to a change in government's spending. As we can see, during world war 2 there hasn't been no increase in output despite excessive military expenditures. To top that private expenditure has shrunk. In simple words, except government spending on military, no other component of the GDP is increased. So, the government spending multiplier is negative due to the 3.5% shrinkage in private spending translating to a loss of income to the government along with a increased military expenditure which translates to an increase in government spending.

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