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Eduncle posted an MCQ
October 17, 2019 • 23:17 pm 0 points
  • UGC NET
  • Economics

Under which system the central bank is authorised by law to issue a fixed amount of notes against government securities and any excess is to be fully backed by

Under which system the central bank is authorised by law to issue a fixed amount of notes against government securities and any excess is to be fully backed by gold/silver?

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    Eduncle Best Answer

    Under fixed fiduciary system, the government fixes a fixed amount of notes without keeping any metallic reserve. But this portion of currency must be backed by government securities, which is called fiduciary Limit. The notes issued other than fiduciary limit must be fully backed by gold or silver reserves. This system was introduced in England in1844 in the Bank charter Act of 1844. Norway and Japan also adopted this method . This system acted as a brake on the undue expansion of currency and credit in the time of prosperity. This system also provides security for the convertibility of notes.
    (i) Safety : This method of note issue provides safety to notes issued and acts as brake, which also provides safety to currency value.
    (ii) Stability : This system not only provides value stability but also provides economic stability, which is helpful for regulating internal prices and exchange rate.

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