Fiat money

Examples of Fiat money in the following topics:

• Types of Currency

  • However, nearly all contemporary money systems are based on fiat money.
  • Fiat money is money that derives its value from government regulation or law.
  • The term fiat currency is also used when the fiat money is used as the main currency of the country.
  • Commercial bank money differs from commodity and fiat money in two ways.
  • Fiat, Commodity, and Commercial Bank money are three main types of money

• The Definition of Money

  • Money comes in three forms: commodity money, fiat money, and fiduciary money.
  • Fiat money is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold).
  • Instead, it has value only by government order (fiat).
  • Paper money is an example of fiat money.
  • Most modern monetary systems are based on fiat money.

• Answers to Chapter 1 Questions

  • If the savers hide their money under the mattress, then they remove this money from the economy.
  • Fiat money is paper money and is more convenient to carry around than gold coins.
  • However, a central bank can print as much fiat money that it needs.
  • Finally, commodity money retains its value and has other purposes than as money.
  • People can convert some assets to money easily, so they are almost money.

• Limits of Fiscal Policy

  • They are more likely to argue that deficit spending is necessary, either to create the money supply (Chartalism) or to satisfy demand for savings in excess of what can be satisfied by private investment.
  • Chartalists argue that deficit spending is logically necessary because, in their view, fiat money is created by deficit spending: one cannot collect fiat money in taxes before one has issued it and spent it, and the amount of fiat money in circulation is exactly the government debt – money spent but not collected in taxes.

• Forms of Money

  • Commodity money could be full-bodied money.
  • Second form of commodity money is representative full-bodied money.
  • Most of humanity used commodity money before the 20th century until government and central banks had replaced it with fiat money.
  • Governments and central banks created the second payment system, fiat money, and it is a 20th century creation.
  • Most central banks in the world today use fiat money.

• Silverties Versus Goldbugs

  • During the Civil War, the U.S. switched from bimetallism to a fiat money currency to finance the war.
  • The Panic of 1893 was a severe nationwide depression that brought the money issue to the forefront.
  • The "silverites" argued that using silver would inflate the money supply and mean more cash for everyone, which they equated with prosperity.
  • Advocates predicted that if silver were used as the standard of money, they would be able to pay off all of their debt.
  • The debt amount would stay the same but they would have more silver money with which to pay it.

• Monetary Policy

  • Monetary policy is the process by which the monetary authority of a country controls the supply of money.
  • Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.
  • It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it.
  • Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money.
  • There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat; reducing the monetary base; and increasing reserve requirements with the effect of contracting the money supply; and, if reversed, expand the money supply.

• Monetary Policy

  • An expansionary policy increases the total supply of money in the economy more rapidly than usual.
  • A contractionary policy expands the money supply more slowly than usual or even shrinks it.
  • A policy is referred to as "contractionary" if it reduces the size of the money supply, increases the money supply slowly, or if it raises the interest rate.
  • There are several monetary policy tools available to achieve these ends including increasing interest rates by fiat, reducing the monetary base, and increasing reserve requirements.
  • All of the tools have the effect of contracting the money supply and, if reversed, expanding the money supply.

• Functions of Money

  • After World War II, at the Bretton Woods Conference, most countries adopted fiat currencies that were fixed to the U.S. dollar.
  • Money acts as a standard measure and common denomination of trade.
  • Money functions as:
  • This is why diamonds, works of art, or real estate are not suitable as money.
  • The value of the money must also remain stable over time.

• Growth Through Monetary Policy

  • Monetary policy is exercised by the Federal Reserve System ("the Fed"), which is empowered to take various actions that decrease or increase the money supply and raise or lower short-term interest rates, making it harder or easier to borrow money.
  • With lower interest rates, it's cheaper to borrow money, and banks are more willing to lend it.
  • We then say that money is "easy. " Attractive interest rates encourage businesses to borrow money to expand production and encourage consumers to buy more goods and services.
  • Monetary policy rests on the relationship between the rates of interest in an economy (the price at which money can be borrowed) and the total money supply.
  • All have the effect of contracting the money supply and, if reversed, expand the money supply.