The Business Cycle (c)

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Accelerator and Multiplier Effects
Basic to all of business- and their causes is the relationship between and . New have what is called a multiplier effect: that is, money paid to wage earners and suppliers becomes to them and then, in turn, becomes to others as the wage earners or suppliers spend most of their earnings. An ripple effect is thus set into motion.

, an increasing level of spent by has an accelerating influence on . Higher demand greater to increase in production, in order to meet that demand. Both of these also can work in a way, with reduced greatly , and reduced demand reducing the amount of spending.

the
Since the Great , have been built into most to help prevent severe business . For , unemployment insurance provides most workers with some when they are laid off. Social and pensions paid by many organisations furnish some to the increasing number of retired people. Although not as powerful as they once were, trade unions remain an obstacle against the cumulative wage drop that aggravated . to support crop prices (such as the European Common Agricultural ) shield farmers from disastrous loss of .

The government can also attempt direct to counter a recession. There are three : monetary , fiscal , and . differ sharply in their choice of .

Monetary is preferred by some , including the American Milton Friedman and other of monetarism, and is followed by most conservative governments. Monetary controlling, the central bank, the money supply and interest rates. These determine the and costs of loans to businesses. Tightening the money supply helps to counteract inflation; loosening the supply helps from a recession. When inflation and recession simultaneously - a often called stagflation - it is difficult to know which monetary to apply.

Considered more effective by American John Kenneth Galbraith are fiscal measures, such as increased taxation of the wealthy, and an , which to hold wages and prices down to a level that reflects productivity growth. This latter has not had much success in the post-World War II .