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Question
What is a ‘legal tender’? What is ‘fiat money’?
Short/Brief Note
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Solution
Legal tender refers to the currency notes and coins being issued by the monetary authorities of India (RBI and government of India) as a legal medium of payment. Fiat money derives its value only because of government order (fiat). The currency becomes fiat money when the government declares it to be the legal tender. This is not backed by reserves, but by faith or trust. This money does not have intrinsic value, i.e. the real value is not equivalent to the face value printed on the notes and coins.
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