Question 1.6

1. The White House urged Congress to pass a package of temporary spending increases and tax cuts in early 2009, a time when employment was plunging and unemployment soaring.

   This illustrates the principle that government policies can change spending. The tax cut increased people’s after-tax incomes, leading to higher consumer spending.

2. Oil companies are investing heavily in projects that will extract oil from the “oil sands” of Canada. In Edmonton, Alberta, near the projects, restaurants and other consumer businesses are booming.

   This illustrates the principle that one person’s spending is another person’s income. As oil companies increase their spending on labor by hiring more workers, or pay existing workers higher wages, those workers’ incomes rise. In turn, these workers increase their consumer spending, which becomes income to restaurants and other consumer businesses.

3. In the mid-2000s, Spain, which was experiencing a big housing boom, also had the highest inflation rate in Europe.

   This illustrates the principle that overall spending sometimes gets out of line with the economy’s productive capacity. In this case, spending on housing was too high relative to the economy’s capacity to create new housing. This first led to a rise in house prices, and then—as a result—to a rise in overall prices, or inflation.