Read the following statements, Assertion (A) and Reason (R), carefully and choose the correct alternative given below:
Assertion (A): Currency notes and coins are called fiat money.
Reason (R): Cheques drawn on savings or current accounts can be refused by anyone as a mode of payment.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).
Assertion (A): Currency notes and coins are called fiat money. — True. Notes and coins are fiat money.
Reason (R): Cheques drawn on savings or current accounts can be refused by anyone as a mode of payment. — True. A cheque can be refused, so demand deposits are not legal tender.
Why R does not explain A?
R is about cheques and legal tender. It says nothing about why notes and coins are fiat money. The real reason is that notes and coins have no intrinsic value, like a gold or silver coin has. Their value comes from the guarantee of the issuing authority.
NCERT (2026-27): “The Supply of Money : Various Measures … The value of the currency notes and coins is derived from the guarantee provided by the issuing authority of these items. Every currency note bears on its face a promise from the Governor of RBI that if someone produces the note to RBI, or any other commercial bank, RBI will be responsible for giving the person purchasing power equal to the value printed on the note. The same is also true of coins. Currency notes and coins are therefore called fiat money. They do not have intrinsic value like a gold or silver coin. They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction. Cheques drawn on savings or current accounts, however, can be refused by anyone as a mode of payment. Hence, demand deposits are not legal tenders.” |