Money And Credit Flashcards
MONEY AS A MEDIUM OF EXCHANGE
The use of money spans a very large
part of our everyday life.
several transactions are made in any single day where goods are being bought and sold with the use of money.
services are also exchanged with money where there might be not be a actual transfer of money taking place but a promise to pay money later.
Why are transaction made in money?
A person holding money can easily
exchange it for any commodity or
service that he or she might want.
Thus everyone prefers to receive
payments in money and then
exchange the money for things that
they want.
If people were to survive on barter system the parties must need to agree to sell and buy each others commodities. This is known as double coincidence of wants.
in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants. Since money acts as an intermediate in the exchange process,
it is called a medium of exchange.
Barter System
Both parties have to agree to sell and buy each others commodities.
This is known as double coincidence
of wants.
What a person desires to sell is exactly what the other wishes to buy.
In a barter system where goods are directly
exchanged without the use of money,
double coincidence of wants is an
essential feature.
Currency
Modern forms of money include currency — paper notes and coins.
The modern currency is without any use of its own.
It is accepted as a medium of exchange because the currency is authorised by the
government of the country.
In India, the Reserve Bank of India issues currency notes on behalf of the central government.
The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India.
Hence, the rupee is widely accepted as a
medium of exchange.
