Question

In today's world, all countries in the world use fiat money. Explain what problems are associated with using fiat money, and discuss what possible risks if an economy relies on commodity money alone.

Answer 1

Fiat money is the money or legal tender whose value is backed by the government. Eg coins and paper money

Problem associated with Fiat money is first, it is believed to be stable and backed up government support, but during cases of hyperinflation or recession, this value of money goes in for a toss and it completely losses its value.

Secondly, since there is no record of how money changes hands, it is indirectly supporting illegal activities and black markets since such criminals can easily be paid in fiat money. Instead of this, digital money if used would curb such problems.

Commodity money is money which derives its value from the commodity it is made of. Eg tea, gold etc

The risk associated with this type of money is it can change its value any time of its lifespan eg ouring floods or hurricanes commodities become scarce and their value changes.