Money overcomes the problem of a double coincidence of wants inherent in the barter system, through its function as
a: a) Medium of exchange.
b) Unit of account.
c) Standard of deferred payment.
d) Store of value.
e) All of the above
The correct answer and explanation is:
The correct answer is: a) Medium of exchange.
In a barter system, individuals must directly exchange goods or services that are mutually desired by both parties. This creates a “double coincidence of wants,” meaning that each person must have what the other wants at the same time, which can be highly inefficient and limiting. Money overcomes this problem by acting as a medium of exchange. This function allows money to be used as an intermediary in trade, so one person can sell goods or services in exchange for money, and then use that money to purchase other goods or services. This removes the need for a direct match of wants, simplifying transactions.
Money is universally accepted for goods and services, and its use as a medium of exchange makes trade more efficient. For instance, someone who has a surplus of food but needs clothing can sell the food for money, and then use that money to purchase clothing, even if the clothing seller has no interest in food. This broadens the scope of trade, enabling specialization and a greater variety of goods and services to be exchanged.
In addition to the medium of exchange function, money also serves other roles such as being a unit of account, store of value, and standard of deferred payment. However, in relation to overcoming the double coincidence of wants, the key function is its role as a medium of exchange. The other roles of money are important but serve more to enhance its utility in various ways, such as providing a consistent measure for prices or facilitating savings and credit.