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The closer to the source of light, the broader the beams are
New money enters the economy unevenly. The closer you are to the source of money, the more you benefit from it.
Entrepreneurs receive the benefits of new money much more easily, as rich people invest their incomes/savings (as they have higher MPS) --> money enters the circular flow once savings are invested.
The early receivers of money get to spend it before the effects of that new money cause a rise in price level. Money trickles down slowly to wage earners, which distorts relative real paid prices across industries. This exacerbates wealth inequality.
Suppose a central bank conducts quantitative easing (QE), purchasing government bonds from financial institutions. The newly created money initially enters the financial system. Banks and asset holders therefore receive the additional liquidity before households.
Money enters the economy via:
Government spending
BoE asset purchases
Commercial bank loans
Large corporations / investors
For example, imagine £1bn is created and initially used to purchase financial assets. Asset prices rise first, benefiting existing asset holders. Those beneficiaries then spend some of their additional wealth on goods and services, increasing demand and potentially pushing up their prices.
Workers whose nominal incomes adjust only later may face higher prices before their wages increase, reducing their real wages.
Hence, the process of monetary expansion can alter relative prices and the distribution of real income and wealth because monetary injections are non-neutral in the short run.
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