PROBLEM SET 6
1. What is money? Which ones are its functions? Explain them briefly.
Money is a generally accepted means of payment. Mainly, the money has three functions:
a. Medium of Exchange: It is an effective way to buy and pay services and goods
b. Store of Value: It can be used as a way of retaining purchasing power into the future
c. Unit of Account: As we have study, the value of the GDP is expressed by money
2. Define the reserve ratio and explain briefly how commercial banks create money
(fractionary-reserve system).
The reserve ratio is the portion of depositors' balances that banks must have on hand as
cash. With the other portion they invest it or loan by an a given interest, and this is how
the bank create the money, not only by the deposit but also with the loans and
investment
3. How do we measure inflation? Explain. Find the inflation rate of the following
economy considering that the basket includes the following products: 2 oranges, 4
tomatoes, 1 lettuce and 1 bottle of brandy and that the base year is 2016.
Inflation is computed as the growth rate of the CPI (Price Consumer Index) between
two years. The CPI is an index is a measure that examines the weighted average of
prices of a basket of consumer goods and services, such as transportation, food and
medical care. In order to compute we have to:
a. Fix the basket of goods and services
b. Find the prices of the goods for every period
c. Compute the basket cost for every period
d. Choose the base year and compute the CPI
Inflation Rate==
CPI (2017)=X100= 104,17
CPI (2016)=100
Clara Ramos García, 100386398
Group 18
