Question

"Money is a means of lowering the transaction costs of making exchanges." Do you agree or disagree? Explain your answer.

Short answer

The statement is agreed with as money, acting as a medium of exchange, does reduce transaction costs. It simplifies trades by eliminating the issues inherent to barter systems - such as the requirement of double coincidence of wants, and furthermore, it allows for a simple comparison of prices across different goods and services.

Step-by-step solution

Definition of Key Concepts

Start by defining the key terms in the statement. Money is any good that is widely accepted in exchange for goods and services. Transaction costs are the costs that parties incur in the process of agreeing to and following through on a bargain. Exchanges refer to the process of giving one thing and receiving another.

Explain the Function of Money

Elaborate on the function of money. As a medium of exchange, money facilitates trade by avoiding the inefficiencies of a barter system, like the 'double coincidence of wants' problem.

Link Money to Transaction Costs

Money helps to reduce transaction costs in several ways. It eliminates the need for barter, speeds up transactions, simplifies the comparison of prices, and facilitates contractual relationships.

Formulate Your Stance

Based on the reasoning, express whether you agree or disagree with the statement and give your reasoning as to why.