In a moneyless economy, direct exchange of goods and services gives rise to several major transaction frictions. Match each specific limitation of the barter system on the left with the corresponding function of money on the right that resolves it.
- Requirement for two trading partners to mutually desire each other's goodsMedium of exchange
- Absence of a single pricing standard to express the relative worth of different commoditiesUnit of account
- Inability to preserve wealth stored in perishable goods over time without deteriorationStore of value
- Uncertainty and disagreement in settling credit obligations and future debts in physical goodsStandard of deferred payment
Answer
Mutual desire requirement corresponds to Medium of exchange; Absence of a single pricing standard corresponds to Unit of account; Inability to preserve wealth in perishable goods corresponds to Store of value; Uncertainty in credit obligations corresponds to Standard of deferred payment.
Each limitation of the barter economy directly corresponds to a specific primary or secondary function of money developed to overcome that transaction barrier: mutual desire requirements are solved by medium of exchange, price standard deficiencies by unit of account, perishability and savings barriers by store of value, and credit friction by standard of deferred payment.
Step-by-Step Solution
Key Concept
Resolving Barter Limitations through Functions of Money