Justify the following statements with valid arguments : (a) Money serves as the 'medium of exchange' for transactional purposes in an economy. (b) The Central Bank acts as Banker's Bank in an economy.

Question

Accepted Answer

(a) **Medium of Exchange:** Money serves as a medium of exchange because it is generally accepted as a means of payment for goods and services. This function eliminates the need for double coincidence of wants, which was a major limitation of the barter system. It separates the acts of buying and selling, allowing them to occur independently. Any person can sell goods for money and use that money to buy goods from anyone else.

(b) **Banker's Bank:** The Central Bank acts as Banker's Bank by performing the same functions for commercial banks that commercial banks perform for their customers. It accepts deposits from banks, lends money to banks in times of need (as a lender of last resort), and clears inter-bank payments through the clearing house.