Final answer:
Paper money is known as fiat money, with its value rooted in legal decree and universal trust rather than being backed by a commodity. Its divisibility allows for transactions of varying sizes, and too much of it can lead to inflation or hyperinflation, impacting economic stability.
Step-by-step explanation:
Paper money in today's economy is considered fiat money, which means it has no intrinsic value and is not backed by a physical commodity such as gold or silver. Instead, it is legal tender declared by a government for the payment of debts. The divisibility of paper money is one of its fundamental characteristics, allowing it to break down into smaller denominations for transactions of varying sizes.
Fiat currencies rely on the universal faith and trust that the money has value. This trust is crucial for money to function as a medium of exchange and a store of value, enabling the smooth operation of economies. The divisibility of money coupled with its acceptance allows for more efficient trading and financial dealings.
However, the amount of money in circulation must be carefully managed as excessive money supply can lead to inflation or even hyperinflation, drastically reducing its value. Hyperinflation can cause an economy to revert to barter or adopt a foreign stable currency, disrupting economic stability.