CHAPTER 28MONEY GROWTH AND INFLATION633A complete answer to this question requires an understanding of short-runfluctuations in the economy, which we examine later in this book. Yet, even now, itis instructive to consider briefly the adjustment process that occurs after a changein money supply.The immediate effect of a monetary injection is to create an excess supplyof 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 theywanted. But after the helicopters drop the new money and people pick it up off thestreets, people have more dollars in their wallets than they want. At the prevailingprice 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. Theymight buy goods and services with their excess holdings of money. Or they mightuse this excess money to make loans to others by buying bonds or by depositingthe money in a bank savings account. These loans allow other people to buy goods
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