If a society chooses to use fiat money, it
A) must guarantee the convertibility of its currency into gold.
B) give its central bank independence.
C) cannot make use of a banking system.
D) must have a mechanism for regulating the quantity of money in the economy.

Question

Quizplus · Accepted Answer

Fiat money is not backed by a commodity such as gold, therefore the society must have a mechanism for regulating the quantity of money in the economy. This is typically done through the central bank, which uses tools such as interest rates and reserve requirements to control the money supply. Choice A is incorrect as guaranteeing the convertibility of currency into gold would make the currency a commodity-backed currency, not a fiat currency. Choice B is incorrect as central bank independence is not necessary for the use of fiat money. Choice C is incorrect as a banking system is typically used in conjunction with fiat money.

If a Society Chooses to Use Fiat Money, It