UPSC Prelims 2018 Question:

Which one of the following statements correctly describes the meaning of legal tender money?

Explanation:

• Legal tender is anything recognized by law as a means to settle a public or private debt or meet a financial obligation, including tax payments, contracts, and legal fines or damages. The national currency is legal tender in practically every country. A creditor is legally obligated to accept legal tender toward repayment of a debt.
  
  
• 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 the Reserve Bank of India (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. 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.
  
  

Therefore, option (2) is the correct answer.

Subject: Economics | Money and Banking