Make use of the quantity equation to answer the following problem. If the Fed increases the money supply by 4%, velocity increases by 1%, and economic growth is 3%, by how much will the price level increase?

What will be an ideal response?

Since the percent change in the money supply plus the percent change in velocity equals the percent change in real GDP plus the percent change in the price level, the price level will increase by 2% (4% + 1% - 3%).