The use of money contributes to economic efficiency because:

• A. it increases the amount of goods produced in an economy
• B. it eliminates the problem of scarcity
• C. it reduces the need for barter and lowers transaction costs
• D. it ensures that all resources are allocated equally

Answer: (C)

Verified step by step guidance

1. Understand the role of money in an economy: Money acts as a medium of exchange, a unit of account, and a store of value, which facilitates transactions between buyers and sellers.
2. Recognize the problem of barter: In a barter system, goods and services are exchanged directly, which requires a double coincidence of wants (both parties must want what the other offers). This makes trade inefficient and limits economic activity.
3. Identify how money improves efficiency: By serving as a commonly accepted medium of exchange, money eliminates the need for a double coincidence of wants, making transactions smoother and faster.
4. Understand transaction costs: These are the costs associated with making an exchange, such as time spent searching for trading partners and negotiating deals. Money reduces these costs by simplifying the exchange process.
5. Conclude that the use of money contributes to economic efficiency primarily because it reduces the need for barter and lowers transaction costs, thereby facilitating more trade and better allocation of resources.