Why do most nations use fiat money today?

• A. Fiat money allows governments to control the money supply and respond to economic changes.
• B. Fiat money is backed by gold, making it more stable than commodity money.
• C. Fiat money is less expensive to produce than digital currencies.
• D. Fiat money prevents inflation by limiting the amount of currency in circulation.

Answer: (A)

Verified step by step guidance

1. Understand the definition of fiat money: it is currency that a government declares to be legal tender but is not backed by a physical commodity like gold or silver.
2. Recognize the key advantage of fiat money: it allows governments and central banks to have control over the money supply, enabling them to implement monetary policy to stabilize the economy.
3. Analyze why backing by gold (commodity money) is less flexible: commodity money limits the ability of governments to respond to economic changes because the money supply depends on the availability of the commodity.
4. Consider the cost and practicality: fiat money is generally less expensive to produce than commodity money and can be managed more easily than digital currencies, but the main reason for its use is control over the economy, not production cost.
5. Evaluate the relationship between fiat money and inflation: while fiat money can potentially lead to inflation if mismanaged, it does not inherently prevent inflation by limiting currency; rather, it provides tools for governments to influence inflation through monetary policy.