How does the use of money encourage specialization in an economy?

• A. By discouraging individuals from focusing on specific tasks
• B. By limiting the number of goods and services available
• C. By reducing the costs and difficulties associated with exchange
• D. By increasing the need for barter between individuals

Answer: (C)

Verified step by step guidance

1. Understand the concept of specialization: It refers to individuals or firms focusing on producing a limited range of goods or services to increase efficiency and productivity.
2. Recognize the role of exchange in specialization: For specialization to be beneficial, individuals must be able to trade their specialized goods or services for other goods and services they need.
3. Identify the problem with barter systems: Barter requires a double coincidence of wants, meaning both parties must want what the other offers, which makes exchange difficult and costly.
4. Explain how money solves this problem: Money acts as a medium of exchange, reducing the costs and difficulties associated with trading by providing a common and widely accepted means of payment.
5. Conclude that by facilitating easier and more efficient exchange, money encourages individuals to specialize in specific tasks, knowing they can trade their output for other goods and services.