Fiat money is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed . Most modern paper currencies, such as the U.S. dollar, are fiat currencies.
What is the problem with representative money?
One problem with representative money is that its value fluctuates with the supply and price of gold or silver , which can cause problems of inflation or deflation (a sustained rise or fall in the general level of prices).
What are the advantages of representative money?
Because representative money is tied to a physical object , it is less prone to depreciation by inflation. With a representative money system, the government cannot just print as much money as they want. The amount of money they can print is limited by the amount of the commodity they have.
What are the characteristics of representative money?
Representative money is an item such as a token or piece of paper that has no intrinsic value but can be exchanged on demand for a commodity that does have intrinsic value , such as gold, silver, copper, and even tobacco.
What is the key advantage of commodity money?
The main advantages of commodity money are: Commodity money serves an added or supplementary purpose . For instance, in addition to being commodity money, cigarettes can be smoked, while gold and silver can be used for making pieces of jewelry. The value of commodities used in commodity money remains constant.
What is representative money example?
Representative money includes things like token coins, paper money and different forms of certificates representing commodities. They have no value of its own and it is not made from the commodity it represents. Gold and silver certificates are two examples of representative money.
Is check a representative money?
Representative money is government-produced money backed by a physical commodity such as precious metals. Other forms of representative money are still in place, including financial instruments like checks and credit cards. ... This was followed by precious metals like gold and silver.
Why is fiat money bad?
Changes in public confidence in a government issuing fiat money may be enough to make the fiat currency worthless. Commodity money, however, retains value based on the metal or other material content it has. Fiat money is therefore more at risk of inflation because its value is not intrinsic .
Is money printed based on gold?
In the 20 th century, gold was used to support fiat currencies or legal tender of a country. It was used as a world reserve currency through most of this time. ... Thus, it limited the printing of fiat currencies. In fact, the United States of America used gold standard up till 1971 after which it was discontinued.
What are the advantages and disadvantages of representative money?
Because representative money is tied to a physical object, it is less prone to depreciation by inflation . With a representative money system, the government cannot just print as much money as they want. The amount of money they can print is limited by the amount of the commodity they have.
What are 3 characteristics of money?
The characteristics of money are durability, portability, divisibility, uniformity, limited supply, and acceptability .
What are the qualities of good money?
- General acceptability.
- Portability.
- Durability.
- Divisibility.
- Homogeneity.
- Cognizability.
- Stability.
What is importance of money?
Money is not everything, but money is something very important. Beyond the basic needs, money helps us achieve our life’s goals and supports — the things we care about most deeply — family, education, health care, charity, adventure and fun.
What are the major disadvantages of commodity money?
While commodity money typically has less volatility during turbulent economic developments, commodity money can still lose value . ... Supply and demand can significantly affect the price of commodities. For example, after a hurricane, the supply of oil may get disrupted, causing the price of oil to rise.
What are the four functions of money?
whatever serves society in four functions: as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment .
What is our money backed by?
Fiat currency is legal tender whose value is backed by the government that issued it . The U.S. dollar is fiat money, as are the euro and many other major world currencies. This approach differs from money whose value is underpinned by some physical good such as gold or silver, called commodity money.
