Chapter 14.1, Problem 3R

To determine

To ascertain the government policy that has a significant effect on fiat money and legal tender.

Explanation of Solution

Fiat currency is a legal tender that is approved by the tendering authorities. As with the euro and many other major currencies around the world, the US dollar is a fiat currency. It's a major monetary-policy driver, and a government's ability to regulate the money supply. Legal tender is any currency that a nation considers legal. Governments typically create a fiat currency and make it a legal tender by making it a precondition for debt repayment. In the United States, the dollar is both legal tender and fiat currency.

The value of fiat money depends on how a country's economy performs, how it governs itself, and the impact of those factors on interest rates. A country with political instability is likely to have a weaker currency and inflated energy prices, making it impossible for people to buy commodities when they need them.

Maintaining overflow and demand by the Federal Reserve, for example, has allowed the 2008 financial Crisis to be resolved as a result of adverse effects on the US economic system and the global economy. Many governments use a fiat currency and then make it a legal tender by setting it as the debt-repaying standard.

With the development of the Emergency Banking Act of 1933, the federal government started authorizing citizens to trade money for government gold. The gold standard, which backed U.S. money with federal gold, ended entirely in 1971, when the U.S. also began supplying gold to foreign governments in exchange for U.S. currency.

Since then, U.S. dollars have been recognized to be guaranteed full faith and credit by the U.S. government, legal tender for both public and private debts, but not redeemable in legal money in the U.S. In this context, rather than lawful currency, U.S. dollars are now legal tenders.

Economics Concept Introduction

Introduction: It had been recognize six main policy roles within market economies. Governments provide the work of legal and social framework that foster competition facilitates, merits goods for public, redistribute taxes, change externalities and stabilize the economy.