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.

How does a system work as a medium of exchange?

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.

Why is currency a medium of exchange?

The standardization of currency as the medium of exchange has enabled quick trade settlements. A medium of exchange eases the trade of goods and services. The most common and generally accepted medium of exchange in the modern economy is money – represented as currency.