There was a political coup in Zimbabwe and the new military dictatorship is prom

Question

There was a political coup in Zimbabwe and the new military dictatorship is promising to raise government expenditure on goods. (Label all axes and curves carefully. Mark key points/coordinates) 1. Using the aggregate demand and aggregate supply graph, show what are the long run consequences of government spending increase for the price level. 2. Assume that the monetary authority wants to prevent the change in the output level that the expenditure increase would cause.What can it do and what consequences will its actions have for the interest rate (short run), and price level (long run)? Show using relevant diagrams.

Explanation / Answer

The study finds evidence that public expenditure significantly shrinks under military dictatorship compared with other form of governance.

This finding is not surprising since a military dictatorship historically has high entry and exit costs; entry may require the overthrowing of a powerful ruler, or mass killing through a military coup, or even civil war, whereas exit might involve the imprisonment or death of the military dictator. As a result, military dictators would be un-able to implement any effective fiscal policy because of the uncertain span of the government. This uncertainty might then influence military dictators to cut down on government expenditure and as well as make them very reluctant to undertake ambitious projects which require further expenditure. In most cases, countries under the rule of a military dictatorship do not receive any foreign aid from international donors, and international trade with such countries becomes restricted, which may also reduce government expenditure in these countries. Other than political regime variables, `Years of office' and `Number of government variables are found to be highly significant and positive in influencing. Government expenditure, ”Years of office” explains how a government increases its confidence in large investments and long-term fiscal decisions, if the same government remains in power and runs a country for a long time, whereas the “Number of government” variable shows how influential a government can be if one political party has an absolute majority in the parliament.

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