ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -In contrast to commodity-based money like gold coins or paper bills redeemable for precious metals, fiat money is backed entirely by the full faith and trust in the government that issued it.

Detailed explanation-2: -Fiat money is the term used to describe currencies that are backed by the government that issued them and aren’t aren’t tied to the value of a physical commodity such as gold or silver. They derive their value largely through the public’s trust in the issuers. Most of the currency in the world is now fiat money.

Detailed explanation-3: -Money is nothing without trust. People have to trust that their money has value and that others will accept it. They also need to be confident that organisations, such as banks, that handle and look after their money won’t lose it and will keep their data secure.

Detailed explanation-4: -Rather, money derives its value from the trust people place in it. History shows, however, that this trust can be lost if mismanaged. For example, if too much paper money is printed and issued, the value of the money will fall; that is, high inflation will result. In fact, hyperinflation can result.