What is an advantage of fiat money compared to commodity money?

• A. Relies on trust, potential for inflation, and governmental policy risk.
• B. Can support flexible monetary policy.
• C. Requires mining of a commodity.
• D. Is immune to inflation.

Answer: (B)

Fiat money’s advantage is the ability to support flexible monetary policy. Because its value isn’t tied to a physical commodity, a central bank can adjust the money supply and use tools like interest rate changes, open market operations, and reserve requirements to influence inflation, employment, and overall economic activity. This responsiveness helps authorities address economic changes and shocks. With commodity money, the supply of the money is linked to the commodity’s availability, making it hard to expand or contract the money stock to meet demand. Inflation risk exists in fiat money when policy is mismanaged, but the key benefit is the policy flexibility it provides.