ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When applied to paper money, fiat currency refers to the scary notion that our dollar has value only because the government says it does. The United States Dollar (USD), the Euro and most other major currencies are fiat monies.

Detailed explanation-2: -Legal tender refers to any currency that is declared as legal by the government while fiat money is referred to as money that is not backed up by any physical commodities such as gold. They are backed by the government. Fiat currencies provide more control to the central banks over the economy.

Detailed explanation-3: -Even the Indian currency INR is also a fiat money. These fiat currencies are quite easy to issue, as the government or the central bank has not to issue any backup commodity for it. But at the same time, fiat money is quite risky as it can lead to high inflation of the economy.

Detailed explanation-4: -Fiat money has value only because of the government as it manages that value or because any two parties in a transaction can agree on its value. Governments used to mint coins out of a worthy physical commodity, such as gold or silver, or print paper money that could be obtained for a set amount of a physical entity.