Question

Identify that function of money which has effectively solved the problem of ‘double coincidence of wants’ in transactions.

• A. Standard of deferred payment
• B. Store of value
• C. Measure of value
• D. Medium of exchange

Hint:

Money as a medium of exchange removes the need for double coincidence of wants and makes trade more efficient.

Answer 1

The Correct Option is D

Concept: Functions of Money
Money performs several important functions in an economy, which help in facilitating smooth economic transactions and overcoming the limitations of the barter system:

• Medium of exchange: Money is widely accepted as a means for buying and selling goods and services.
• Measure of value: It provides a common unit in which the value of goods and services can be expressed.
• Store of value: Money allows individuals to store purchasing power for future use.
• Standard of deferred payment: It is used for future payments such as loans and credit transactions.

Step 1:Understand the problem
Double coincidence of wants is a major limitation of the barter system. It occurs when:

• Two individuals must simultaneously have a need for each other's goods or services.
• For example, if a person with wheat wants cloth, they must find someone who has cloth and also wants wheat.
• This condition is difficult to satisfy in a large and complex economy, making barter inefficient.

Step 2:Role of money
Money removes the problem of double coincidence of wants through its function as a medium of exchange:

• A person can sell their goods or services in exchange for money instead of directly trading for another good.
• The money received can then be used to purchase any other goods or services as per their needs.
• This separates the act of selling from buying, making transactions more flexible and efficient.
• As money is generally accepted, it eliminates the need to find someone with matching wants.

Conclusion: \[ \text{Medium of exchange solves the problem by eliminating the need for double coincidence of wants.} \]