Why in news?

The Iran’s parliament has passed a bill allowing the government to slash four zeros from the Iranian ‘rial’.

Iran’s national currency will be changed from the Iranian rial to the ‘Toman’, which is equal to 10,000 rials, under the bill.

Why did they need a new currency?

  • There was a sharp fall in the value of the currency as a result of crippling U.S. sanctions.
  • As a result, the Iranian currency was trading at about 156,000 rials per dollar. To put it into perspective, Indian Rupee trades at about 75 Rupees for now, so 1 Rupee is equal to 555 Iranian Rial.
  • Iran’s weak currency and high inflation have led to sporadic street protests since late 2017.

Example of such inflation in the past:

  • The African nation of Zimbabwe provided an example of the worst-case scenario in the early 2000s.
  • In response to serious economic problems, the country’s central bank began to print money at a staggering pace.
  • That resulted in hyperinflation, which ran between 230 and 500 billion percent in 2008.
  • Prices rose rapidly and consumers were forced to carry bags of money just to purchase basic staples.
  • At the height of the crisis, 1 trillion Zimbabwean dollars were worth about 40 cents in U.S. currency.

What is Fiat Money?

Fiat money:

  1. It’s in the form of coin / currency Notes / (or sometimes virtual crypto coin).
  2. It is issued by the order of a King / Queen / Government / Central Bank.

The value of fiat money is derived from the relationship between supply and demand.

  • When fiat money (currency/ coins) is legally valid for all debts & transactions throughout the country, such Fiat Money is called a Legal tender.
  • Fiat money gets its value from a government order (i.e., fiat). That means, the government declares fiat money to be legal tender, which requires all people and firms within the country to accept it as a means of payment.
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