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Economy

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Monetary policy controls a recession and inflation by setting how much money is supplied in an economy. Monetary policy is given by central bank.

When an economy is in a recession phase, the central bank will typically increase the money supplied which will help reduce interest rates; increasing spending. When inflation is a problem, the central bank will typically decrease the money supply, which will increase interest rates; slowing spending.

Fiscal policy controls the taxes. It is given by government. A fiscal policy is when the government changes taxation and increases government spending. Through an expansionary fiscal policy it aims at increasing the amount of disposable income people will have. This income will, depending on the marginal propensity to consume, be spent in the economy. The result of this will be that aggregate demand will increase thus eliminating the deflationary gap which is caused by either growth or unemployment. Moreover fiscal policy aims at increasing government spending. If government spending increases the investment in the economy which will be translated as an increase of investment in the economy and which will in turn close the deflationary gap.

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Pure competition: In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product.

Demand and Supply
In a perfectly competitive market, a firm's demand curve is perfectly elastic.

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Demand and supply in oligopoly
The two that are most frequently discussed, however, are the kinked-demand theory and the cartel theory. The kinked-demand theory is illustrated in Figure and applies to oligopolistic markets where each firm sells a differentiated product. According to the kinked-demand theory, each firm will face two market demand curves for its product.
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