Final answer:
Commodity money has intrinsic value and can be used in various industries, while fiat money has no intrinsic value and its value comes from trust and confidence. Commodity money has the potential for value fluctuations, while fiat money can lead to inflation if too much is printed.
Step-by-step explanation:
Commodity money refers to money that has intrinsic value in other uses. For example, gold and salt have been used as commodity money in the past. These items have value not only as money, but also for their use in other industries, such as manufacturing and electronics. On the other hand, fiat money has no intrinsic value and is declared by a government to be the legal tender of a country. Its value comes from the trust and confidence that people place in it.
When comparing the costs and benefits of commodity money, one benefit is its intrinsic value. Commodity money has value beyond being used as a medium of exchange, as it can be used in various industries. For example, gold has value in the electronics and aerospace industry. However, a cost of commodity money is that its value may fluctuate based on the supply and demand of the commodity. This can lead to instability in the economy.
Fiat money, on the other hand, has the benefit of stability. Since its value is not tied to any commodity, it is not subject to fluctuations based on the availability of the commodity. However, a potential cost of fiat money is the risk of inflation. If a government prints too much fiat money, it can lead to a decrease in its value.