What is fiat currency?
This article contains What is fiat currency, what determines the value of fiat money, what can fiat money be used for, and what are the pros and cons of fiat money.
Fiat currency is a type of money that is issued by a government and proclaim to be legal tender. This kind of currency isn’t associated with any asset of value and could be printed at will by the central government. Though the government should be careful in order to avoid over-circulation, this may result in a drop in value.
What determines the value of fiat money?
The value of a currency is dependant on what is may be used for, not as the coin or cash have any particular value. It is money that may be used because it is centered on a trust relationship involving the issuer, the holder, and those who receive it – consequently, the demand and supply could be loosely controlled by the market and government.
When trust in the value of a currency is lost, it would lose demand that’ll cause a fall in value. The trust of currency is eventually centered on members of the economy, believing it is worth something. The value of fiat money is not directly held in a physical asset such as a precious metal or a product that is useful to someone.
What can fiat money be used for?
Fiat money is popularly accepted all around the world to buy nearly any good or service. Fiat currency will come in a form of paper money, credits, coins, loans, or bonds. If you apply for credit cards or personal loans and it is approved, that credit card or amount of money you get is a form of fiat money since you are basically using money on the basis of one’s agreement and creditworthiness that you will repay the funds usually with interest.
Fiat money may also be useful for exchanging currency when you are going on a break, traveling, or sending money across the world.
What are the pros and cons of fiat currency?
Among the advantages that fiat currency has is that it is the most accepted kind of currency. It is supported by many payment networks and currency exchanges across the world. Fiat money also can help fix a country’s economy for just two reasons: governments control the money supply and it is not based on a volatile commodity.
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