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IAI Actuarial Core Principles · Business Economics · Role of money and interest rates in the economy

In a village market, a farmer wants rice and can offer only wheat, but the rice seller wants cloth. Which problem of barter does this illustrate, and which function of money removes it?

This is the double coincidence of wants problem, because the rice seller does not want wheat. It is solved by money acting as a medium of exchange, which lets the farmer sell wheat for money and then buy rice separately.

  1. ALack of divisibility, solved by money as a store of value
  2. BDouble coincidence of wants, solved by money as a medium of exchangeCorrect
  3. CLack of a common measure, solved by money as a standard of deferred payment
  4. DDouble coincidence of wants, solved by money as a unit of account only
  5. Perishability of goods, solved by money as a medium of exchange

Explanation

Each party needs to want what the other offers, which is the double coincidence of wants problem. Money as a generally accepted medium of exchange lets the farmer sell wheat for money and then buy rice. Unit of account alone would not allow the transaction to be completed.

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