Explain how the value of representative money was guaranteed?
Question: Explain how the value of representative money was guaranteed?
Representative money is a type of money that is not backed by a physical commodity, such as gold or silver, but by a promise from the issuer to redeem it for a certain amount of another asset. For example, paper bills or coins that can be exchanged for a fixed quantity of gold at a central bank are representative money.
The value of representative money was guaranteed by the credibility and trustworthiness of the issuer, usually a government or a central bank. The issuer had to maintain enough reserves of the underlying asset to satisfy the demand for redemption. If the issuer failed to do so, or if the public lost confidence in its ability or willingness to honor its promise, the representative money would lose its value and become worthless.
Representative money was widely used in history, especially during the gold standard era, when many countries pegged their currencies to gold. However, most countries abandoned representative money in the 20th century and adopted fiat money, which is money that has no intrinsic value and is not convertible into any other asset. Fiat money derives its value from the legal tender status granted by the government and the general acceptance by the public.
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