Suppose that this year's money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion.

The price level is

, and the velocity of money is

.

Suppose that velocity is constant and the economy's output of goods and services rises by 5 percent each year. Use this information to answer the questions that follow.

If the Fed keeps the money supply constant, the price level will , and nominal GDP will .

True or False: If the Fed wants to keep the price level stable instead, it should keep the money supply unchanged next year.

True

False

If the Fed wants an inflation rate of 12 percent instead, it should the money supply by

. (Hint: The quantity equation can be rewritten as the following percentage change formula: