Currency notes and coins are called fiat money because:

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → they do not have intrinsic value like a gold or silver coin.

Notes and coins are called fiat money because their value comes from the guarantee of the issuing authority. The paper or metal in them is worth very little.

Option (1) they cannot be refused by any citizen of the country for settlement of any kind of transaction. — Incorrect. This is why notes and coins are called legal tender.

Option (2) they are issued by the central bank and act as a basis for credit creation. — Incorrect. This describes high-powered money, the currency issued by the central bank.

Option (3) they are payable by the bank on demand from the account-holder. — Incorrect. This describes demand deposits, the balances in savings and current accounts.

Option (4) they do not have intrinsic value like a gold or silver coin. — Correct. A gold coin is worth its gold. A note or a coin has no such intrinsic value.

NCERT (2026-27): “Central bank … From the point of view of money supply, we need to focus on its function of issuing currency. This currency issued by the central bank can be held by the public or by the commercial banks, and is called the ‘high-powered money’ or ‘reserve money’ or ‘monetary base’ as it acts as a basis for credit creation.”

“The Supply of Money : Various Measures … Apart from currency notes and coins, the balance in savings, or current account deposits, held by the public in commercial banks is also considered money since cheques drawn on these accounts are used to settle transactions. Such deposits are called demand deposits as they are payable by the bank on demand from the account-holder. … 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. …”