A Level Economics AQA Practice Exam

What role does money play in an economy?

1. It serves as a unit of account only

2. It is a scarce resource

3. It serves as a medium of exchange for purchasing goods and services

4. It is only a store of value

The correct answer is: It serves as a medium of exchange for purchasing goods and services

Money plays a crucial role in an economy primarily as a medium of exchange, facilitating trade and transactions. This function of money simplifies the process of buying and selling goods and services by eliminating the inefficiencies of barter systems, where a double coincidence of wants is necessary. When money is used as a medium of exchange, it allows individuals and businesses to engage in transactions without needing to find someone who has what they want and who also wants what they have. This efficiency encourages more extensive market participation, contributes to economic growth, and enhances the fluidity of economic activity. In addition to being a medium of exchange, money also serves other important functions, such as acting as a unit of account, providing a measure to compare the value of diverse goods and services, and serving as a store of value, enabling individuals to save and transfer purchasing power over time. However, these secondary roles do not negate the primary and essential function of money in making exchanges easier and more efficient.