According to marketwatch, the Department Defense has proclaimed that they will reduce the spendings for the war in Iraq as the war slowly comes to an end. The process they choose to do this is by lowering the fiscal budget for 2012 since the 2011 fiscal budget which effectively froze spending this year at the 2010 level. The face value for the 2012 core budget was 1% growth above the 2011 budget.
"We expect growth to turn negative next year, which is why we remain cautious on defense," Spingarn said.
As the consumer is taxed by the fiscal policy, this money is then transferred to the government which is "spent" on the military as well as other things. Without this budget, the government uses the money at the President's and Congress' discretion which will affect the household and businesses. By bringing home the troops, the President will then use the same fiscal budget, which will become lowered, on things better for the consumer.
3 comments:
How does this decrease in government spending (on the war) affect the economy? Explaining through the circular flow model.
The decrease in government spending on the war affects the economy by allowing the government to have more money and decrease the "leakage" of the circular flow since they will be able to lower taxes since the money will not be needed for the war if we are taken out. The injection into the flow will increase since they will have more money to give out since the spending towards the war will be deleted. The circular flow is going to expand between households and businesses. Businesses will produce more since the households will have more money they're willing to spend unless they save for the next recession that is coming.
I believe that it is a smart move to decrease spending on the war. As it comes to a close, there is no longer a great need for supplies and things necessary for war. I dont think many Americans will be complaining about the lowering of taxes. I agree that this decrease will benefit the economy although it may not be a large benefit.
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