The paper of a hundred-rupee note is worth much less than Rs 100. Yet…

The paper of a hundred-rupee note is worth much less than Rs 100. Yet people accept the note for goods worth Rs 100. Why?

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Its value comes from the guarantee given by the authority that issues it.

The worth of a note does not come from its paper. It comes from the promise of the issuing authority. Every note carries a promise from the Governor of RBI to give purchasing power equal to the value printed on it.

Such money has no intrinsic value, unlike a gold coin. That is why currency notes and coins are called fiat money.

Option (1) Its value comes from the guarantee given by the authority that issues it. — Correct. The RBI’s promise printed on the note is what gives it value.

Option (2) The paper and the printing of the note are worth Rs 100. — Incorrect. The paper is worth much less than Rs 100, as the question itself says.

Option (3) It can be exchanged at any time for gold of the same value. — Incorrect. The note carries a promise of purchasing power equal to its printed value, not a promise of gold.

Option (4) It earns interest for the person who holds it. — Incorrect. A currency note earns no interest. Bonds and deposits earn interest.

NCERT (2026-27): “THE SUPPLY OF MONEY : VARIOUS MEASURES … Though a hundred-rupee note can be used to obtain commodities worth Rs 100 from a shop, the value of the paper itself is negligible – certainly less than Rs 100. Similarly, the value of the metal in a five-rupee coin is probably not worth Rs 5. … 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.”