What It Is:

Currency is a medium of exchange for goods or services within an economy.

How It Works/Example:

Currency can be either fiat or tied to an underlying asset. Fiat money has no intrinsic value and is backed by the full faith and credit of the issuing government. That is, this type of currency is not worth very much in terms of its value as a raw material. Most paper money is fiat money, and its value comes from what it represents rather than what it is. Asset-backed currencies tied to gold, silver or other valuable commodities are rare in present day markets.

Why It Matters:

Currency serves an important role in an economy, and has three universally accepted economic advantages: it acts as a medium of exchange, a store of value, and a standard of value. Meaning it allows buyers and sellers to quickly arrive at comparative prices instead of haggling over how many of one good is worth compared to an unlimited number of others.

It is important to remember, though, that fiat money is only as good as the organization that issues it. If the entity defaults, the currency is worthless.