Lesson: Money as the medium of exchange What Is a Medium of Exchange

Lesson: Money as the medium of exchange
What Is a Medium of Exchange
A medium of exchange is an intermediary instrument or system used to facilitate the purchase and sale of goods and services between parties.
For a system to function as a medium of exchange, it must represent a standard of value. Further, all parties to the transaction must accept that standard.
In modern economies, the medium of exchange is currency. Gold has served as a medium of exchange throughout history.

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  A medium of exchange is a portable instrument that is used as an intermediary to facilitate the sale and purchase of goods between parties.
  
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  In modern economies, the medium of exchange is currency.
  
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  A currency must remain reasonably stable in value in order for it to work as an intermediary. If its value becomes unstable, it is no longer viable as a means of exchange.
  

How a Medium of Exchange Works
A traditional barter system only works when both parties to a transaction have something that the other party wants. Even then, it works only when both parties agree on the value of the goods that each is offering. Is one chicken worth two bars of soap or three? The haggling must have been endless.
Thus, introducing a medium of exchange allows for greater efficiency in an economy and stimulates an increase in overall trading activity. One or both parties can sell their product for a number of gold coins, which can then be used to buy the products they want.
Using a medium of exchange allows for greater efficiency in an economy and stimulates an increase in overall trading activity.
Money As a Medium of Exchange
Money enables anyone who possesses it to participate as an equal market player. When consumers use money to purchase an item or service, they are effectively making a bid in response to an asking price.
This interaction creates order and predictability in the marketplace. Producers know what to produce and how much to charge, while consumers can reliably plan their budgets around predictable and stable pricing models.
If money—as represented by a currency—is no longer viable as a medium of exchange, or if its monetary units can no longer be accurately valued, businesses and consumers lose their ability to plan. Market volatility will cause the markets to become chaotic.
Prices are bid up, or raised, in response to worries about scarcity and fears of the unknown. Meanwhile, supply diminishes because of hoarding behavior, coupled with an inability of producers to quickly replenish inventory.