Can You Desribe Fixed Fiduciary System And Proportional Reserve System And Their Advantages?


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Sajid Majeed Profile
Sajid Majeed answered
Fixed fiduciary system:
This is new form of currency principle, according to this system, the central bank can issue notes up to certain limit fixed by Govt. Which is backed by Govt. securities and bonds and if at any time Govt. want to issue more notes then they should be backed by 100% gold reserve. We can say in other words that Govt. security and excess of amount should be backed by 100% metallic reserve.

This system is check on inflation and there is no chance of over issue because of 100% metallic reserve.
This system provides security for the convertibility of notes. It is fit for those countries where the people use cheques for making payments and requirement of currency do not change from season to season.

Proportional reserve system:
According to this system proportion of note issue is backed by metallic reserve and rest of the amount is backed by Govt. securities and bonds. In other words central bank issue notes 25% to 40% of which is backed by gold and rest of 60% to 75% is backed by Govt. securities. The proportional percentage is different from countries to countries. In Pakistan, this percentage is 30%. It means that 100 rupee note is issued against 30 coins of gold. Govt. can change to percentage required for metallic reserve in certain condition.
Advantages:The main advantage of this system is that it makes the supply of money elastic.
Anonymous Profile
Anonymous answered
In today's contex, we require some different system which can regulate inflation also.

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