AUDHU BILLAHI MINA SHWAITAN RAJEEM BISMILLAHI ARAHMAN ARAHEM A BEAUTIFULL PAGE

THE FOLLOWING ARE THE CAUSES OF INFLATION. Reduction in peoples savings leading to increase in increase in peoples consumption expenditure. Increase in money supply in the economy which is not backed by increase in output of goods and services in the economy. Increase in taxation by the government which leaves the public with high deposable incomes. Reduction in imports of essential commodities and increase in importation of luxurious commodities. Defecite financing by the government that is to say direct borrowing from the central bank leading to demand pull inflation. Increased cash flow in the economy which leads to increase in money supply in the economy leading to demand pull inflation. A reduction in the production capacity of the commodity leading to increase in the supply of the commodity leading to inflation in the economy. The break down of most roads and poor communication leads to supply rigidities which causes bottle neck inflation due to shortage of goods and services. Importation of commodities from countries already affected by inflation. This leads to imported inflation since the prices of goods and services imported is high. The greed for high profits by the business men which makes them to increase the prices of final goods and services hence price wage inflation. Devaluation. In the past the government has been devaluing her currency in an attempt to solve B.O.P Balance of payment problems problem but due to inelastic for imports, the prices of goods and services increases. The use of poor technology which has made Uganda not to fully exploit her resources hence demand pull inflation at the point of full utilization of resources.

A decline in the level of savings due to low interests due to low interest rates has led to increase in consumption of expensive hence causing excessive demand inflation. Speculative effect. In Uganda, some business men hoard goods and services when they expect that the government is likely to increase wages. Hoard goods and services are normally sold at high prices hence speculative inflation. Protectionism and shortage of foreign exchange to import some essential goods and services hence price wage inflation. EFFECTS OF INFLATION IN AN ECONOMY. The following are the positive effects of inflation in an economy. When there is mild inflation, business men stand to gain because costs of production rise to slower areas compared to prices of final goods and services. Therefore there is an increase in the prices of goods and services leading to inflation. Mild inflation leads to an increase in the level of economic activities that is to say more investments are carried out hence leading to an increase in the countries Gross Domestic Product. Inflation encourages hard work that is to say people are encouraged to become more innovative and inventive. Inflation encourages government revenues because of the increase in the level so of economic activities that can be taxed in an economy. It facilitates the exploitation of the would be idle resources on the economy for example when there is excess demand for goods and services in the economy. Inflation leads to forces savings in the economy. This is because when there is inflation, the prices of goods and services in the economy increase and some people are forced to save before they can afford to buy such goods and services. Mild inflation encourages people to borrow because during inflation, people are encouraged to save. It encourages mobility of labour as workers move from job to job, place to place with the hope of getting higher wages and this reduces the shortage in so me sectors and surpluses in others. Mild inflation stimulates aggregate demand in the economy and removes the economy out of depression.

A times, inflation forces the country to import substitution industrialization strategy as a way of controlling imported inflation and in turn this promotes industrialization. The following are the negative effects of inflation in the economy. Hyper inflation discourages investment level as it increases production costs. Galloping inflation discourages savings as people prefer to spread their money on various consumers durable. Run away inflation leads to balance of payment difficulties because it encourages exports and encourages imports which are appear cheaper. Inflation leads to capital out flow and discourages foreign inverters. This is because foreign investors sink their capital in an economy with a lot of economic uncertainties. Inflation leads to different co operations to loose confidence in particular a currency that has declined in value. This makes money to loose its function as a medium of exchange. Galloping inflation discourages long term contracts. This is because those could undertake contracts loose confidence due to distorted times as the unit of money declines. Hyper inflation may channel resources into non productive sectors which are not taxed like mansions and other luxuries. Inflation affects government plans and other development projects. It may call several periodical revision wages, tax rates, contracts, etc. that may necessitate deficit financing for projects to be implemented. Inflation reduces peoples purchasing power which lower consumption growth hence the poor may not afford the basic necessities of life. Inflation widens the income gap between the poor and the rich. I.e. It redistributes resources from the poor to the rich. During inflation, the money lenders loose because of the amount repaid plus interest may be worthless in real terms than the original values. This is true where interest rate is below inflation rate. Fixed income earnings suffer for as the price of goods and services rises. Fixed income has a reduced purchasing power hence their real income fails.

MEASURES UNDERTAKEN BY THE GOVERNMENT TO CONTROL INFLATION. The government uses tight fiscal policy through increasing taxation as a way of reducing the peoples purchasing power and lowering the aggregate demand for goods and services. The government in times of inflation has always tried to reduce its expenditure as an desirable tool to combat its excessive demand. The government has been borrowing money from the public as a way of reducing money supply. And such borrowed funds directed in productive areas to promote higher out put levels. The government uses tight monetary policies that aim at reducing the amount of money in circulation for this objective, it has been selling securities especially treasury bills and bonds necessary to reduce the volume of money and that minimizes price increase. The government in consultation with some producers has been instituting price controls (maximum price legislation) with the view of controlling prices of essential commodities to solve demand pull inflation. The government uses income policy which aims at setting minimum wage and a times age freezing so as to reduce the purchasing power of workers and also lower production costs on the side of producers. The government has created favorable policies to encourage inflow which has promoted investments on the increased production capacity which gradually is creating price stability. Non price control measures like reduced tariffs has increased import lower their price and a way of curbing imported inflation. The government has increased on the agricultural products through agricultural modernization and land reform policies and marketing of agricultural products produce. Export promotion strategy. This is being done to increase foreign exchange earning to enable a countries imports goods and services that are inn short supply and fight scarcity inflation. Political stabilization. Through the use of peace talks and military offensive. The government has created peace in most parts of the country in order to encourage production an d stabilize prices of goods and services. The government has improved on the infrastructural network like transport and communication and power generation system to solve bottle neck inflation.