As firms expect future profits to increase, they increase their investment. As a result, real GDP rises above potential GDP. If the Fed followed Friedman's k- percent rule, the Fed would

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According to Friedman's K-percent rule, the Fed should continue allowing the quantity of money to grow at a constant rate (k-percent) regardless of the changes in the economy. Therefore, in the given scenario, the Fed should not decrease the quantity of money or raise the federal funds rate, but should continue with the k-percent rule to maintain a stable monetary policy.

As Firms Expect Future Profits to Increase, They Increase Their