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Principles of Economics- Mankiw (5th) 613

Principles of Economics- Mankiw (5th) 613 - CHAPTER 28 M O...

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CHAPTER 28 MONEY GROWTH AND INFLATION 633 A complete answer to this question requires an understanding of short-run fluctuations in the economy, which we examine later in this book. Yet, even now, it is instructive to consider briefly the adjustment process that occurs after a change in money supply. The immediate effect of a monetary injection is to create an excess supply of money. Before the injection, the economy was in equilibrium (point A in Fig- ure 28-2). At the prevailing price level, people had exactly as much money as they wanted. But after the helicopters drop the new money and people pick it up off the streets, people have more dollars in their wallets than they want. At the prevailing price level, the quantity of money supplied now exceeds the quantity demanded. People try to get rid of this excess supply of money in various ways. They might buy goods and services with their excess holdings of money. Or they might use this excess money to make loans to others by buying bonds or by depositing the money in a bank savings account. These loans allow other people to buy goods
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