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CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking

Which statement about legal tender money is correct?

Legal tender is money that a creditor cannot lawfully refuse when a debt is settled, within limits set by law. Cheques are not legal tender since they may be declined, and legal tender status does not depend on gold backing or on banks accepting it.

  1. AIt is money that a creditor cannot refuse in settlement of a debt, within limits set by lawCorrect
  2. BIt is money that only banks may accept
  3. CIt is any instrument that a bank honours, including cheques, without exception
  4. DIt is money backed only by gold reserves

Explanation

Legal tender is money that the law requires creditors to accept for settling debts, subject to legal limits. Cheques are not legal tender because a creditor may refuse them. Legal tender status is not tied to gold backing or to banks alone.

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