The use of money spans a very large part of our everyday life. Several transactions can be identified which involve money in any single day.
In many of these transactions, services are being exchanged with money.
For some, there might not be any actual transfer of money taking place now, but a promise to pay money later.
The reason for transactions being made in the form of money is simple. A person holding money can easily exchange it for any commodity or service that he or she might want.
Thus, everyone prefers to receive payments in money and then exchange the money for things that they want.
In a barter system, where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. Also, what a person desires to sell is exactly what the other wishes to buy.
In contrast, in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants.
Now, since money acts as an intermediate in the exchange process, it is termed as a ‘medium of exchange’.