Final answer:
Fiat money is currency that a government has declared to be legal tender, which is not backed by a physical commodity but by the trust and faith in its value.
Step-by-step explanation:
In almost all countries, governments mandate their citizens to accept the currency that the government issues. This type of money is called fiat money. Fiat money has no intrinsic value but is declared by a government to be a country's legal tender. Governments typically include statements on their currencies, such as the one found on the United States' paper money: "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE."
This means that by law, people can settle debts using the nation's currency, despite it not being backed by a commodity like gold or silver. The value of fiat money is instead based on the universal faith and trust that the currency has value.