CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

One cannot take about inflation direct reference to money. Money has to do with anything which by law and custom is commonly accepted in payment for goods and services or for the settlement of debt. In the modern world, specialization and division of labour has necessitated the use of an acceptable medium of exchange. Living is earned by indirectly producing goods and services for other people and receiving goods and services from others in return. Money is necessary fore specialization and specialization is the basis of high standard of living. However, the value of money determines both specialization as well as the standard of living. Among the characteristics of money are that it must be relatively scarce and sustain stability of value. The use of money expected to provide a convenient way of storing wealth. For instance, one can sell goods today and store the money until when needed. If prices are stable, then one knows exactly how much command over real goods and services has been stored up when certain sum of money has been accumulated. If prices change rapidly, then one has little idea how many goods one will be able to command when previously accumulated money is spent.

Clearly, then, rapid fluctuations in general level of prices reduce the usefulness of money as a store of value. To an economist, then, money is like any other commodity, though with its special characteristics, its supply and demand must interact to give what is called equilibrium. A position of equilibrium for any commodity including money is reached when the quantity demanded is equal to quantity supplied. Whenever there is a disequilibrium between supply and demand, an inflationary situation many may arise.