Question

2019-10-3 Skills Check: Money & Banking 1. Money solves the problem of double coincidence of wants that would regularly occur under a system of _ 2. Why is money only an imperfect store of value? 3. What is the problem associated with the double coincidence of wants?

Answer 1

1. Barter System.

Double coincidence of wants is an essential feature in a barter system where goods are directly exchanged without the use of money. Therefore, money, by providing the crucial intermediate step, eliminates the need for double coincidence of wants. A person holding money can easily exchange it for any commodity in service that he or she might want.

2. Money is only an imperfect store of value because over time, as inflation rises the 'value' of a dollar decreases.For something to retain and store its value it must at least keep up with inflation. Thus, we can say that Inflation can make money an imperfect store of value simply because inflation rates increasing will change a persons purchasing power for a good or service. For example, a dollar 10 years from now will not be able to buy the same quantity of goods as it can buy today.

3. Double coincidence of wants is an economic phenomenon where two parties each hold an item the other wants, so they exchange these items directly without any monetary medium. Double coincidence of wants means that both of the parties have to agree to sell and buy each commodity.

Now let's say, I want to buy a pair of shoes in exchange for a T-shirt, But, the person who has shoes is not willing to buy a T-shirt.Such situations would create a deadlock in an otherwise flawless economy. In such situations, money acts as an intermediate source, eliminating the need for such double coincidence of wants. A person holding money can easily exchange it for any commodity in service that he or she might want.