Fiat Money is a type of currency that is not backed by a commodity, such as gold or silver, but is backed by the country’s full faith and credit. It is typically designated by the government to be legal tender. Legal tender includes coins and currency, generally anything recognized by law as a means to settle a public or private debt or to meet a financial obligation including tax payments, contracts, and legal fines or damages. The national currency is legal tender in practically every country. A country can try to maintain a fixed Exchange Rate by varying its interest rate, buying or selling its currency on the open market, or by imposing capital constraints to prevent investors from withdrawing capital. The Mundell-Fleming model posits the country can pursue only 2 of these 3 at any one time.
