Question

A major drawback of the Maximum Fiduciary System is:

• A. Lack of security
• B. High gold requirement
• C. Risk of over-issuance or inelasticity
• D. No legal backing

Answer 1

Answer:

C. Risk of over-issuance or inelasticity

While the system allows issuing currency up to a fixed fiduciary limit, exceeding this can lead to over-issuance, causing inflation. Conversely, the set limit may also make the money supply inelastic, restricting the central bank’s ability to respond to sudden economic needs. This trade-off between flexibility and stability is the main drawback of the system.