This paper examines the effects of sector-specific changes in government spending on macroeconomic variables using a two-sector dynamic general equilibrium model, where capital reallocation between sectors is costly. The authors argue that accounting for the composition of government spending is crucial for understanding its aggregate effects. They find that consumption, real product wages, and manufacturing productivity fall in response to exogenous military buildups in the post-World War II United States. The behavior of additional variables, such as relative prices, different measures of the real wage, interest rates, and the composition of investment, is well-explained by their sectoral model of the impact of government spending. The paper also presents new evidence that challenges the view that the data are fundamentally at odds with the neoclassical model, demonstrating that imperfect capital mobility can substitute for imperfect competition as a mechanism for producing predictions about business-cycle dynamics.This paper examines the effects of sector-specific changes in government spending on macroeconomic variables using a two-sector dynamic general equilibrium model, where capital reallocation between sectors is costly. The authors argue that accounting for the composition of government spending is crucial for understanding its aggregate effects. They find that consumption, real product wages, and manufacturing productivity fall in response to exogenous military buildups in the post-World War II United States. The behavior of additional variables, such as relative prices, different measures of the real wage, interest rates, and the composition of investment, is well-explained by their sectoral model of the impact of government spending. The paper also presents new evidence that challenges the view that the data are fundamentally at odds with the neoclassical model, demonstrating that imperfect capital mobility can substitute for imperfect competition as a mechanism for producing predictions about business-cycle dynamics.