Q. 13.9( 16 Votes )

What is money? How is it used as a medium of exchange?

Answer :


Money is a ‘medium of exchange’. This is because throught the use of money, a person can buy or sell(i.e.exchange)whatever he/she wants. We can understand how money functions by contrasting it with another system of exchange.


This other system is called the ‘barter system’. In this system, person X sells commodity A in exchange of commodity B from person Y. This exchange is called the ‘double coincidence of wants’. However, if person X wants a commodity that person Y doesn’t want, or vice a versa, then the transaction cannot be conducted.


Therefore, in order to eliminate this problem, money becomes an intermediate step, which removes the problem of double coincidence of wants. In this way, money become same medium of exchange.


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