What is fiat money/currency, what are its advantages and disadvantages?

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Fiat currency is money that is not backed by a physical commodity, such as gold or silver. The value of it is largely based on the public’s faith in the currency’s issuer, which is normally that country’s government or central bank. The value of fiat currency is derived from the relationship between supply and demand and the stability of the issuing government. The difference between fiat money and commodity and its advantages and disadvantages relates to their intrinsic value. Commodity money has an intrinsic value that is derived from the materials it is made of, such as gold and silver coins. The other one, 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.

Advantages of fiat money:

One of the most important advantages of this money type is that a country’s central bank has greater control over fiat money’s supply and value. This means that governments can manage the credit supply, liquidity, and interest rates more reliably.
Fiat currency serves as a good currency if it can handle the roles that a nation’s economy needs of its monetary unit, including storing value, providing a numerical account, and facilitating exchange.

Disadvantages of fiat money:

Since it is not tied to a tangible asset, one of the most important disadvantages of fiat money is that its value of it is dependent on responsible fiscal policy and regulation by the government. Irresponsible monetary policy can lead to inflation and even hyperinflation of a fiat currency.
Another disadvantage is that there are more opportunities for the creation of bubbles with fiat money due to its unlimited supply. It is an economic cycle in which there is a rapid increase in price before an equally rapid price decline.

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