Question

question 36
the conversion of a barter economy to one that uses money
does not increase economic efficiency.
increases efficiency by reducing transactions costs.
increases efficiency by reducing the need to specialize.
increases efficiency by reducing the need to exchange goods and services.

Explanation:

In a barter economy, transactions require a double coincidence of wants, leading to high transaction costs (like time spent finding a suitable trading partner). Money acts as a medium of exchange, eliminating this need. So converting to a money - based economy reduces transaction costs, which increases economic efficiency.

• The first option is wrong because using money does increase efficiency.
• The third option is wrong as money actually encourages specialization (since people can produce what they are good at and exchange for other goods using money, rather than being limited by barter's double coincidence of wants).
• The fourth option is wrong because money facilitates exchange, not reduce the need for it.

Answer:

B. increases efficiency by reducing transactions costs.