Question

Write Short Notes on Types of Paper Money.

Answer 1

Paper money are the money which are issued by the central bank of a country in form of paper that acts as an unlimited legal tender in the economy. There are following types of paper money:

1. Representative paper money: Representative paper money is the paper money which is fully backed by gold and silver reserves. Under the monetary system of representative money, the quantity of gold and silver which is equal to the value of paper currency issued are kept in the reserves by the monetary authority.

2. Convertible paper money: Convertible paper money refers to the paper money which is easily convertible into standard coins or metals. These are maintained as reserves with the monetary authority.

3. Inconvertible paper money: Inconvertible paper money refers to the paper money which is not convertible into standard coins or valuable metals. Under the system of inconvertible paper money, the monetary authority maintains no metallic reserves against paper currency like in case of representative and convertible paper money.

4. Fiat money: Fiat money refers to that money which is issued by order or authority of the government. It includes all notes and coins which the people in a country are legally bound to accept as a medium of exchange.