Question

Under a fiat-money standard the value of the circulating medium of exchange is guatanteed by

• A. Some precious commodity such as gold or silver.
• B. By the taxing and borrowing powers of the government.
• C. The paper it is printed on.
• D. Does not have any value.

Answer 1

The correct option is B By the taxing and borrowing powers of the government.

Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy.