Explain the adjustment process in the money market that creates a change in the price level when the money supply increases.

When the money supply increases, there is an excess supply of money at the original value of money. After the money supply increases, people have more money than they want to hold in their purses, wallets and checking accounts. They use this excess money to buy goods and services or lend it out to other people to buy goods and services. The increase in expenditures causes prices to rise and the value of money to fall. As the value of money falls, the quantity of money people want to hold increases so that the excess supply is eliminated. At the end of this process the money market is in equilibrium at a higher price level and a lower value of money.