Legal Tender

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Definition of 'Legal Tender'

Legal tender is any form of money that is recognized by a government as valid for the payment of debts, taxes, and other financial obligations. In the United States, legal tender is defined as coins and paper currency issued by the United States Treasury. Legal tender is not the same as money, which is any item that is generally accepted as a medium of exchange. For example, gold and silver are considered to be money, but they are not legal tender in the United States.

Legal tender has several important functions. First, it provides a common medium of exchange that can be used to buy goods and services. Second, it serves as a store of value, meaning that it can be saved and used to purchase goods and services in the future. Third, it is a unit of account, meaning that it can be used to measure the value of goods and services.

The government has the power to create legal tender. In the United States, this power is granted to the Congress by the Constitution. The Congress can create legal tender by issuing coins and paper currency. The Federal Reserve also plays a role in the creation of legal tender. The Federal Reserve can issue paper currency and can also buy and sell government bonds. These actions can affect the supply of money in the economy and can also affect the value of the dollar.

Legal tender is important for the smooth functioning of the economy. It provides a common medium of exchange, a store of value, and a unit of account. The government has the power to create legal tender, and the Federal Reserve plays a role in the creation of legal tender.

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