Why is modern currency accepted as a medium of exchange even though it is not made of precious metals and has no intrinsic use of its own?
Generated by claude-sonnet-4-6 · 2026-06-26 13:23 · grounding rag
Model Answer
Modern currency has no intrinsic value and is not made of precious metals, yet it is accepted as a medium of exchange because it is authorised by the government. In India, the Reserve Bank of India issues currency notes on behalf of the central government. The law makes it legal tender — no individual can legally refuse a payment made in rupees.
Source: Chapter 3, Modern Forms of Money — Currency
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Explanation
- The examiner expects two clear points: (1) government authorisation, and (2) legal tender status (no one can legally refuse it).
- Mentioning RBI's role adds precision and is expected at this level.
- Avoid writing about intrinsic value at length — just acknowledge it briefly and move to the actual reason.
- Do not confuse "authorised by government" with "backed by gold" — modern currency is NOT gold-backed; its acceptance rests purely on legal authority.