Question

Discuss the dangers inherent in the issuance of fiat money

Answer 1

Fiat money is government backed legal tender currency,the control of which lies with the central bank. It is the central bank of the country which prints currency as per the monetory requirements of the economy.

Dangers inherent in the issuance of fiat money----:

# As fiat money supply is under the control of central bank, it can use its power for the selfish purpose. He can use his power to steal resources from people just by printing more currency.

# Fiat money doesnot have any intrinsic value because a paper doesnot have any commodity value by itself.

# One more danger of issuing fiat money is that it loses its value overtime. If you want to save it for a long period,for your retirement period ,it is of no use as it may be of very small value ,it is due to inflation.

#similarly ,more printing of fiat money leads to inflationary conditions in the economy. As we know, printing currency to increase money supply ,brings propensity to consume ,high and as a result,which leads to more aggregate demand.This situation finally brings inflationary conditions i.e the situation when aggregate supply is insufficient to cope up with aggregate supply.,and finally results in rising prices.