Let's say that with our economy in the depths of depression more money is introduced. Provided that the people who receive the extra money are people who will spend it on goods and services that provide an income for others, more goods and services are sold that previously weren't sold, and the producers receive money that previously they didn't receive, so they begin to regain confidence in the saleability of their goods and hire more people. The newly employed people now have more money so they spend more, and so it continues, the spare capacity diminishing and the prices and wages in less essential products picking up. Now that people have more purchasing power they have more products available to them and more money to buy them with - so they tend to buy more non-essential products and better forms of essential products, because they have the means to do so. Hence the prices of the original forms of essential products drops in response to the drop in demand for them, and the prices of non-essentials and better forms of essentials rise in response to the increase in demand for them. Because of this effect the original essential product producers lose out even in the face of economic growth, and the real winners are the non-essential and better essential product producers. In other words the reverse of what happened before now takes place. The increase in prices and wages is not inflation (not yet anyway); it is a reduced level of deflation.
In these circumstances the income multiplier works in our favour to build wealth creation, and if money is repeatedly introduced then wealth creation can build rapidly. Recall the wealth-creating loop: work - create wealth - earn - spend - obtain wealth - consume. This feature now happily multiplies the effect in terms of created wealth of there being more money in circulation. Let's say that £100 million is added; then in the first pass round the loop £100 million worth of additional wealth is created. The workers who created that additional wealth are paid for their work, so there is (say) £70 million more money available for the second pass (not the full £100 million as explained earlier). So without any more money being introduced every pass round the loop results in 70% additional wealth being created than in the previous pass. Overall an extra £333 million worth of wealth will be created for a one-off increase of £100 million in money in circulation. If money is repeatedly added then the income multiplier magnifies the impact in terms of created wealth of every separate increase.
This kind of money injection can only be done at the level of the economy as a whole, i.e. by the government, because the private sector is stuck in the deflationary spiral. Consumers can't afford to spend, and producers and investors won't spend because the demand isn't there for their produce. However, provided that the money introduced is substantial, another factor comes into play, and that is what Keynes described as 'animal spirits'. Provided that sufficient money is injected to generate a large spending increase, producers and investors that had been reluctant to invest due to legitimate fears about inadequate demand now have more confidence, and are increasingly willing to expand production and invest in new businesses. This investment has an immediate effect due to increased spending on capital goods and labour, and a delayed effect due to increased production. This adds to the original injection, hopefully to make it a sustained and self-fuelling recovery. When this takes hold the government needn't keep adding more money. It's like pump priming. Provided that the initial injection is sufficient to prime the pump the pump itself takes over. In these circumstances the income multiplier just keeps on multiplying until all the spare capacity is used up, and the economy is running with full employment at maximum capacity again.
A one-off increase in money in circulation causes several times that increase in the worth of wealth created because of the income multiplier, and if sufficient new money is added then the recovery becomes self-fuelling due to 'animal spirits' taking hold of investors who add further injections of their own.
However it's not all good news. After a severe recession or depression, and even at other times, there often exists structural unemployment - unemployed workers with skills that are no longer needed, and unemployed workers living far from centres of employment. These often go together when a former large industry shuts down because it can no longer compete in the world market. At these times simply increasing the money supply isn't sufficient to absorb this type of spare capacity or to generate animal spirits, and more judicious and targeted spending is needed on retraining and subsidies for the setting up of new factories and enterprises in affected areas. In these circumstances it can take considerable time, sometimes many years, for improvements to be become visible and especially for animal spirits to kick in.
The redistribution of prices between essentials and non-essentials in cases of shrinking or expanding economies is reflected in the share prices of companies that sell essentials and non-essentials. Here the share price changes don't wait for the economy to shrink or grow, just the expectation of shrinkage or growth is enough for share prices to change, those for essential products (known as defensive stocks) rising relative to non-essential products (known as cyclical stocks) for an expectation of shrinkage, and vice versa for expectation of growth. The business cycle is a well-known phenomenon and reflects the fact that the economy regularly cycles between varying degrees of growth and recession. Cyclical stocks are so named because they tend to follow the business cycle, doing well in periods of growth and badly in periods of recession, and defensive stocks do the opposite. The business cycle and its cause are discussed in chapter 52.
The very fact that we have a phenomenon called the business cycle in spite of governments' attempts to tame it indicates clearly that there is poor control over the economy. Money supply and spending are almost always out of kilter with wealth creation.