The correct option is 2 and 3 only.
Explanation
Money serves primarily as a medium of exchange, distinguishing modern economies from barter systems. In a barter system, goods are directly exchanged for goods, whereas money acts as an intermediate instrument to facilitate transactions.
Statement-wise Analysis:
- Statement 1 is Incorrect. Economic exchanges without the use of money are referred to as barter exchanges, not liquidity exchanges. Liquidity refers to the ease with which an asset can be converted into a medium of exchange (cash) without loss of value.
- Statement 2 is Correct. The fundamental function of money is to act as a medium of exchange. It facilitates trade by eliminating the need for a double coincidence of wants, thereby simplifying the transaction process.
- Statement 3 is Correct. In a barter system, an individual must find another person who not only possesses the desired good but also desires the good the first person offers (double coincidence of wants). As the number of individuals and goods in an economy increases, the difficulty and time required to find such a partner-known as search costs-increase significantly.
Key Takeaway: Money eliminates the high search costs and the requirement for a double coincidence of wants inherent in a barter system by serving as a universally accepted medium of exchange.