Fiat money

(noun)

Money that is given value because those who use it believe it has value; the value is not derived from any inherent characteristic.

Examples of Fiat money in the following topics:

  • 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.

  • 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.

  • The Money Multiplier in Theory

    • The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
    • In order to understand the money multiplier, it's important to understand the difference between commercial bank money and central bank money.
    • When you think of money, what you probably imagine is commercial bank money.
    • The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
    • We can derive the money multiplier mathematically, writing M for commercial bank money (loans), R for reserves (central bank money), and RR for the reserve ratio.

  • The Demand for Money

    • In economics, the demand for money is the desired holding of financial assets in the form of money (cash or bank deposits).
    • The equation for the demand for money is: Md = P * L(R,Y).
    • Money is necessary in order to carry out transactions.
    • It is viewed as a "cost" of borrowing money.
    • Monetary policy also impacts the money supply.

  • Shifts in the Money Demand Curve

    • In economics, the demand for money is the desired holding of financial assets in the form of money.
    • The interest rate is the price of money.
    • The real demand for money is defined as the nominal amount of money demanded divided by the price level.
    • When the demand curve shifts to the right and increases, the demand for money increases and individuals are more likely to hold on to money.
    • Explain factors that cause shifts in the money demand curve, Explain the implications of shifts in the money demand curve

  • Present Value and the Time Value of Money

    • The time value of money is the principle that a certain amount of money today has a different buying power (value) than in the future.
    • The time value of money is the principle that a certain amount of money today has a different buying power (value) than the same currency amount of money in the future.
    • This notion exists both because there is an opportunity to earn interest on the money and because inflation will drive prices up, thus changing the "value" of the money.
    • The return of $5 represents the time value of money over the one year interval .
    • The time value of money is the central concept in finance theory.

  • Other Measurements of the Money Supply

    • MB: Stands for "monetary base," referring to the base from which all other forms of money are created.
    • M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).
    • It is M2 – time deposits + money market funds.
    • The different forms of money in the government money supply statistics arise from the practice of fractional-reserve banking.
    • This new type of money is what makes up the non-M0 components in the M1-M3 statistics.

  • The Equilibrium Interest Rate

    • In a economy, equilibrium is reached when the supply of money is equal to the demand for money.
    • Equilibrium is reached when the supply of money is equal to the demand for money.
    • Political gain: both monetary and fiscal policies can affect the money supply and demand for money.
    • In the case of money supply, the market equilibrium exists where the interest rate and the money supply are balanced.
    • Without external influences, the interest rate and the money supply will stay in balance.

  • Defining Inflation

    • Thus, increasing the supply of money increases the price levels.
    • This idea is known as the quantity theory of money .
    • In mathematical terms, the quantity theory of money is based upon the following relationship: M x V = P x Q; where M is the money supply, V is the velocity of money, P is the price level, and Q is total output.
    • Instead, for example, an increase in the money supply could boost total output or cause the velocity of money to fall.
    • This is consistent with the quantity theory of money.

  • Example Transactions Showing How a Bank Can Create Money

    • The amount of money created by banks depends on the size of the deposit and the money multiplier.
    • To understand the process of money creation, let us create a hypothetical system of banks.
    • Even though only $1,000 were added to the system, the amount of money in the system increased by $1,900.
    • The $900 in checkable deposits is new money; Anderson created it when it issued the $900 loan.
    • Calculate the change in money supply given the money multiplier, an initial deposit and the reserve ratio