In order to obtain a commodity, we have to give something in return. That is, we have to pay some consideration in money or money’s worth. This process is called an exchange. There can be two types of exchanges – money exchange and barter exchange. In early days, barter exchange was prevalent. Money as a medium of exchange came much later when people saw deficiencies in the system of barter exchange. For example, consider a person with excess rice in hand and who wants to exchange it for some clothes. Now searching a person who has surplus clothing and who wants to exchange it for rice only is very difficult. The search costs become restrictive as the number of individuals increase. Thus, to avoid such a problem, an intermediate good is necessary which is acceptable to both parties. Such a good is called money.

Which of the following problems can be overcome if money is used for exchange?

All of above

The correct answer is Option 4:All of above

1. Space for storage: Holding the stock of rice requires a lot of space. So, using money eliminates the need for storing bulky or perishable items.

2. Cost of storing rice: As rice is perishable and requires proper storage conditions, using money instead of rice for exchange eliminates the cost associated with storing and preserving rice.

3. Search costs: With money as a medium of exchange, individuals don't need to search extensively for others willing to directly exchange desired goods. Money facilitates transactions more efficiently, reducing the time and effort spent on searching for suitable trading partners.