Macroeconomics: What will happen to prices and GDP during an effect of a short-run for a decreased defense spending?

Question

Macroeconomics: What will happen to prices and GDP during an effect of a short-run for a decreased defense spending?

Answer 1

Here's a short and quick answer:

GDP will fall in the short run. Part of gross domestic product (GDP) is government spending, so if a government decreased defense spending, GDP would fall. If GDP falls, the price level should also fall, this could be said because there's been a decrease in aggregate demand.

Here is the formula for GDP using the expenditure approach:

GDP = C + I + G + Nx

Nx = Net Exports (Exports - Imports)

I = Investment

G = Government Spending

C = Consumer Spending

Price level is usually calculated by finding the CPI or GDP Deflator