Question

A major drawback of the Currency Principle is that it:

• A. Causes inflation
• B. Limits flexibility in note issue
• C. Encourages over-issuance
• D. Reduces security

Answer 1

Answer:

B. Limits flexibility in note issue

Under the Currency Principle, currency notes must be fully backed by government securities. This restricts the central bank’s ability to issue more notes in times of emergency or economic expansion, as issuance is tied to the availability of approved securities. While it ensures stability and public confidence, it reduces monetary flexibility.