Money, as a medium of exchange, means that it can be used to make payments for all transactions of goods and services. It is the most essential function of money. Money has the quality of general acceptability so, all exchanges take place in terms of money. In other words, money eliminates the need for double coincidence of wants for an exchange to take place and can be performed independently of each other. Moreover, money has widened the domain and scope of market. Significance of ‘medium of exchange’ function of money are:
1. This function has removed the major difficulty of lack of double coincidence of wants and inconveniences associated with the barter system.
2. Use of money allows purchase and sale to be conducted independently of one another.
3. This function of money facilitates trade and helps in conducting transactions in an economy.
4. Money has no power to satisfy human wants, but it commands power to purchase those things, which have utility to satisfy human wants.