Exercise Four

Inflation is a increase in the general level of prices of goods and services over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, the inflation produce a loss of real value in the internal medium of exchange and unit of account in the economy.  The inflation rate is A chief measure of price inflation, the annualized percentage change in a general price index.

There were different schools, the most can be divided into two broad areas: quality theories of inflation and quantity theories of inflation. The quality theory of inflation rests on the expectation of a seller accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer. The quantity theory of inflation rests on the quantity equation of money, that relates the money supply, its velocity, and the nominal value of exchanges.

Currently, the quantity theory of money is widely accepted as an accurate model of inflation in the long run. Consequently, there is now broad agreement among economists that in the long run, the inflation rate is essentially dependent on the growth rate of money supply. However, in the short and medium term inflation may be affected by supply and demand pressures in the economy, and influenced by the relative elasticity of wages, prices and interest rates.

In 2011 Colombia  has a inflation rate of 3.17%