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Examples of fiat money. Fiat Money Definition

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Fiat currency definition What is a fiat currency?

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A fiat currency is a national currency that is not pegged to the price of a commodity such as gold or silver.

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Learn more Fiat money vs commodity money Fiat currency, also known as fiat money, is the opposite of commodity money. The difference between fiat money and commodity money relates to their intrinsic value. Historically, commodity money has an intrinsic value that is derived from the materials it is made of, such as gold and silver coins.

Instead, its value is derived by government and the trust people place in its value. In other words, it is a form of currency that only holds value because of government enforcement. At the same time, the true value lies in the trust that people place in it.

Fiat money by contrast, has no intrinsic value — it is essentially a promise from a government or central bank that the currency is capable of being exchanged for its value in goods. Examples of a fiat currency Well-known examples of fiat currencies include the pound sterling, the euro and the US dollar.

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In fact, very few world currencies are true commodity currencies and most are, in one way or another, a form of fiat money. This means that governments can manage the examples of fiat money supply, liquidity and examples of fiat money rates more reliably. Cons of a fiat currency Since it is not tied to a tangible assetthe value of fiat money is dependent on responsible fiscal policy and regulation by the government.

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  2. Any money declared by a government to be legal tender.

Irresponsible monetary policy can lead to inflation and even hyperinflation of a fiat currency. Adding to this, there is greater opportunity for bubbles with fiat currency — an economic cycle in which there is a rapid increase in price before an equally rapid decline in price.

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The increased prevalence of bubbles is because fiat currencies have a virtually unlimited supply, which means that quantitative easing is an option for governments. While possibly providing stimulus to an economy, quantitative easing can also cause greater inflation rates.

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This could impact anything from housing prices to national debt levels, which in turn could impact the financial markets. Build your trading knowledge.