What is a ‘legal tender’? What is ‘fiat money’?
Legal tender refers to currency notes and coins that cannot be refused by any citizen of the country for settlement of any kind of transaction. They act as a universally acceptable medium of payment. Unlike cheques, which can be refused, legal tenders must be accepted.
Fiat money refers to currency notes and coins that do not have intrinsic value like a gold or silver coin. They are called fiat money because they give the person purchasing power equal to the value printed on the note.
Explanation
The textbook defines legal tender in the context of currency notes and coins, emphasizing their acceptability for transactions. It states they 'cannot be refused by any citizen of the country for settlement of any kind of transaction'. Fiat money is defined by the lack of 'intrinsic value' (unlike gold/silver coins) and the fact that they carry purchasing power based on the printed value.
Solution Steps
Step 1: Identify the definition of 'legal tender' from the text: Currency notes and coins cannot be refused by any citizen for settlement of transactions.
Step 2: Identify the definition of 'fiat money' from the text: Currency notes and coins do not have intrinsic value like gold or silver coins but provide purchasing power equal to the printed value.