explain money as a medium of exchange.
Answers
A medium of exchange is an intermediary instrument used to facilitate the sale, purchase or trade of goods between parties. For an instrument to function as a medium of exchange, it must represent a standard of value accepted by all parties. In modern economies, the medium of exchange is currency.
Answer:
MONEY AS A MEDIUM OF EXCHANGE:
1. A person holding money can exchange it for any commodity or service that he or she might want.
2. Thus everyone prefers to receive payments in money and then exchange the money for things that they want.
3. Both parties have to agree to sell and buy each other commodities. This is known as a Double coincidence of wants.
4. What a person desires to sell is exactly what the other wishes to buy.
5. In a barter system where goods are directly exchanged without the use of money, the double coincidence of wants is an essential feature.
6. In contrast, in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants.
7. Money acts as an intermediate in the exchange process, it is called a medium of exchange. This is known as Barter System.