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Social Science: Money and Credit: Role of Money in an Economy - Role of Money in an Economy

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ConceptRole of Money in an Economy

Question

How does money solve the problem of double coincidence of wants? Explain with an example.

Solution

Money solves the problem of double coincidence of wants by acting as a medium of exchange in every manner.

Double coincidence of wants implies a situation where two parties agree to sell and buy each other’s commodities, i.e., what one party desires to sell is exactly what the other party wishes to buy. Money does away this complex situation by acting as a medium of exchange which can be used for one and all commodities.

For example, if an ice-cream vendor wants a bicycle but the bicycle manufacturer wants clothes, not ice-creams, then the vendor can use money to obtain the bicycle. He does need to adhere to the bicycle man’s needs because money acts as the common medium of exchange. Similarly, the bicycle manufacturer can then use that money to buy clothes.

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Solution Concept: Role of Money in an Economy.
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