In the circular flow diagram, how does the use of money make the model more efficient compared to a barter system?

• A. Money eliminates the need for a double coincidence of wants, making transactions easier and faster.
• B. Money prevents firms from interacting with the government sector.
• C. Money reduces the role of households in the circular flow.
• D. Money increases the total amount of goods produced in the economy.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the circular flow diagram, which illustrates how households and firms interact in the economy through markets for goods and services and markets for factors of production.
2. Step 2: Recognize that in a barter system, transactions require a double coincidence of wants, meaning both parties must want what the other offers, which makes trade inefficient and time-consuming.
3. Step 3: Identify that money acts as a medium of exchange, eliminating the need for a double coincidence of wants by providing a commonly accepted item to facilitate transactions.
4. Step 4: Explain how the use of money simplifies and speeds up transactions between households and firms, making the circular flow of income and goods more efficient.
5. Step 5: Conclude that money improves the efficiency of the circular flow model by enabling easier and faster exchanges, unlike barter which restricts trade due to its limitations.