CLASS10 - ECONOMICS - CH3 - MONEY AND CREDIT

 Question 1.

The currency notes on behalf of the Central Government are issued by whom? (2011 D)
Answer:
Reserve Bank of India.

Question 2.
Why do banks ask for collateral while giving credit to a borrower? (2014 D, 2011 OD)
Answer:
Collateral is an asset that the borrower owns (land, building, vehicle, livestock, land documents, deposits with banks, etc.) which stands as a security against the money borrowed. In case the borrower fails to repay the loan, the lender has the right to sell the asset or collateral.

Question 3.
What do banks do with the deposits they accept from customers? (2012 D)
Answer:
Banks use a major portion of deposits to extend loans to people.

Question 4.
What comprises ‘terms of credit’? (2012 OD)
Answer:
Interest rate, collateral and documentation requirement and mode of repayment together comprise terms of credit.

Question 5.
What is the main informal source of credit for rural households in India? (2013 D)
Answer:
Money lenders are the main source of informal credit for rural households.

Question 6.
Which body supervises the functioning of formal sources of loans? (2013 OD)
Answer:
Reserve Bank of India.

Question 7.
‘Modern currency is without any use of its own’; then why is it accepted as a medium of exchange? (2014 OD)
Answer:
Modern currency is accepted as a medium of exchange because it is certified for a particular denomination (?10, ?100, etc.) of the country by authorities set up by the Central Government. It is issued by the Reserve Bank of India and it can be used for buying any commodity which is on sale. It is authorized by the government of the country.

Question 8.
What is the meaning of ‘barter system’? (2015 D)
Answer:
Barter system refers to the system of exchange of goods and services. It is the system by which one commodity is exchanged for another without the use of money. Before money was introduced, people practised barter system.
Example: A farmer could buy a dhoti from a weaver or a pair of shoes from a cobbler in exchange of grains he produced.

Question 9.
What is the meaning of ‘investment’? (2015 D)
Answer:
Investment is buying of an asset in the form of a factory, a machine, land and building, etc. (physical assets) or shares (monetary assets) for the purpose of making or sharing profits of the enterprises concerned.
Common investments are—buying land, factories, machines for faster production, buying small local companies to expand production, cheap labour, skilled engineers, IT personnel, etc.

Question 10.
What is meant by double coincidence of wants? (2015 OD)
Answer:
Double coincidence of wants means when both parties have agreed to sell and buy each other’s commodities.

Question 11.
How does money act as a medium of exchange? (2015 OD)
Answer:
Money acts as a medium of exchange as it acts as an intermediate in the exchange process and transactions. A person holding money can easily exchange it for any commodity or services that he or she might want.

Question 12.
How do the deposits with banks become their source of income? (2016 D)
Answer:
Banks charge a higher interest rate on loans they extend than what they offer on deposits. The difference of interest is the main source of income of banks.

Question 13.
Why one cannot refuse a payment made in rupees in India? (2016 D)
Answer:
One cannot refuse a payment made in rupees in India because it is accepted as a medium of exchange. The currency is authorized by the government of the country.

Question 14.
Compare formal sector loans with informal sector of loans regarding interest only. (2016 D)
Answer:
Most of the informal lenders charge a much higher interest on loans than the formal sector loAnswer:

Question 15.
Why is the supervision of the functioning of formal sources of loans necessary? (2016 OD)
Answer:
Supervision of the functioning of formal sources of loans is necessary because banks have to submit information to the RBI on how much they are lending, to whom they are lending and at what interest rate etc.

Question 16.
Prove with an argument that there is a great need to expand formal sources of credit in rural India. (2016 OD)
Answer:
There is great need to expand formal sources of credit in rural India because:

1. There is no organisation that supervises the credit activities of lenders in the informal sector. They lend at whatever interest rate they choose.
2. No one can stop rural money-lenders from using unfair means to get their money back.

Question 17.
Why are most of the poor households deprived from the formal sector of loans? (2016 OD)
Answer:
Most of the poor households are deprived from the formal sector loans because of lack of proper documents and absence of collateral.

Question 18.
What do you understand by demand deposits?
Answer:
To ensure safety of their money, people deposit their money with banks. Banks accept deposits and pay interest on deposits. People have the provision to withdraw their money as and when they require. Since money can be withdrawn on demand, these deposits are known as demand deposits.

Features:

1. A demand deposit has the essential characteristic of money. It can be used as a medium of exchange.
2. The facility of cheques against demand deposits makes it possible to make payments, without using cash.
3. Since demand deposits are accepted widely as a means of payment along with currency, they constitute money in the modem economy.

Question 19.
Which country has successfully organized SHGs? Who had initiated the programme?
Answer:
Bangladesh has successfully organized SHGs. Grameen Bank of Bangladesh is the biggest success story in reaching the poor to meet their credit needs at reasonable rates. Grameen Bank has now over 6 million borrowers in 40,000 villages across Bangladesh. Most of the borrowers are women and belong to the poorest section of society. This idea is the brain child of Prof. Mohammad Yunus, recipient of 2006 Nobel Prize for Peace.

Question 20.
Highlight the inherent problem in double coincidence of wants. (2017 D)
Answer:
Double coincidence of wants means that when someone wants to exchange his goods with another person, the latter must also be willing to exchange his goods with the first person. It can only work when both the persons are ready to exchange each other’s goods.

Question 21.
How does the use of money make it easier to exchange things? Give an example. (2017 OD)
Answer:
The use of money solves the problem of double coincidence of wants. Money acts as a medium of exchange and serves as a unit of value.

Short Answer Questions (SA) 3 Marks

Question 22.
What is money? Why is modern money currency accepted as a medium of exchange? (2012 D)
Answer:
Money is a medium of exchange in transactions. A person holding money can easily exchange it for any commodity or service that he or she might want.
Modem money currency is accepted as a medium of exchange because

• it is certified for a particular denomination (For example, ₹ 10, ₹ 20, ₹ 100, ₹ 1,000).
• it is issued by the Central Bank of the country.
• it is authorized by the government of the country.

Question 23.
What are the modern forms of money? Why is the ‘rupee’ widely accepted as a medium of exchange? Explain two reasons. (2013 D)
Or
Why is modern currency accepted as a medium of exchange without any use of its own? Give reasons?
Answer:
Modem forms of money currency in India include paper notes and coins which are known as Rupees and Paise.

1. It is accepted as a medium of exchange because the currency is authorized by the Government of India.
2. In India, the Reserve bank of India issues currency notes on behalf of the Central Government of India.
3. The law legalizes the use of rupee as a medium of payment that cannot be refused in settling transaction in India.
4. No Individual in India can legally refuse a payment made in rupees.
   Therefore, the rupee is widely accepted as a medium of exchange.

Question 24.
What is collateral? Why do lenders ask for collateral while lending? Explain. (2012)
Answer:
Collateral is an asset that the borrower owns (land, building, vehicle, livestock, land documents, deposits with banks etc.) which stands as a security against the money borrowed. In case the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to recover the loan money. Most lenders ask for collateral while lending as a security against their own funds.

Question 25.
“Cheap and affordable credit is essential for poor households both in rural and urban areas.” In the light of the above statement explain the social and economic values attached to it. (2013 OD)
Or
“Cheap and affordable credit is crucial for the country’s development.” Assess the statement. (2016 D)
Or
‘Credit has its own unique role for development’. Justify the statement with arguments. (2016 OD)
Answer:
Credit means loAnswer: It refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future repayment.

1. Cheap and affordable credit is crucial for the country’s growth and economic development. Credit is in great demand for various kinds of economic activities—big or small investments, to set up business, buying cars, houses, etc.
2. In rural areas credit helps in the development of agriculture by providing funds to farmers to buy seeds, fertilizers, expensive pesticides.
3. Manufacturers need credit for buying raw material or to meet ongoing expenditure of production. Credit helps in the purchase of plant, machinery, equipment, etc.
4. Some people may need to borrow for illness, marriages etc.
   Thus, cheap and affordable credit is crucial for the country’s growth and economic development.

Question 26.
How does money solve the problem of double coincidence of wants? Explain with an example. (2014 D)
Answer:
Money acts as a medium of exchange. Money can be exchanged for any kind of commodity or service of one’s choice or need. Before money was introduced, people practised barter system. They exchanged goods with each other.
Example, A farmer could buy a dhoti from a weaver or a pair of shoes from a cobbler in exchange of grains he produced.

The problem with the barter system was that both the parties had to agree to sell and buy each other’s product. This is known as double coincidence of wants.

In barter system, where goods are directly exchanged without the use of money, it is essential that there is a double coincidence. Double coincidence is a situation where two persons need or desire to have each other’s product.

Money solves this problem as with money we can buy whatever we want and whenever we want, without having to exchange something in return.

Question 27.
How is money used in everyday life? Explain with examples. (2014 D)
Answer:

1. Money plays a central role in our daily life. It is used as a medium of exchange to carry out transactions.
2. Money buys us food, clothing, shelter and other basic necessities of life.
3. Money provides us social security. It is needed to procure services like transport, education, healthcare, entertainment, recreation, and so on. Money facilitates business and trade and is the basis of the working of an economy.

Question 28.
Explain with examples, how people are involved with the banks. (2014 D)
Answer:

1. Banks help people to save their money and keep their money in safe custody of the bank. Banks accept deposits from the public and also help people to earn interest on their deposits.
2. People can withdraw the money deposited with the bank at the time of their need. As the money can be withdrawn on demand, these are called demand deposits.
3. Banks also grant loans to people for a variety of purposes. In times of need individuals, business houses and industries can borrow money from the banks.

Question 29.
Why is it necessary for the banks and cooperative societies to increase their lending facilities in rural areas? Explain. (2015 D)
Answer:
Banks and Cooperatives can help people in obtaining cheap and affordable loans. This will help people to grow crops, do business, set up small-scale industries or trade in goods and also help indirectly in the country’s development. They should do so, so that relatively poor people do not have to depend on informal sources of credit (money-lenders).

Question 30.
How can money be easily exchanged for goods or services? Give an example to explain. (2016 D)
Answer:
Money as a medium of exchange for goods and services:
A person holding money can easily exchange it for any commodity or service that he or she might want. Everyone prefers to receive payments in money and exchange the money for things they want.

For example: A shoemaker wants to sell shoes in the market and buy wheat. The shoe maker will first exchange shoes for money and then exchange the money for wheat. If the shoemaker had to directly exchange shoes for wheat without the use of money, he would have to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy the shoes in exchange. Both the parties have to agree to sell and buy each other’s commodities. This process is very difficult, time consuming and unhealthy.

Question 31.
“The credit activities of the informal sector should be discouraged.” Support the statement with arguments. (2016 D)
Answer:
The credit activities of the informal sector should be discouraged because:

1. 85% of loans taken by the poor households in the urban areas are from informal sources. There is no organisation that supervises the credit activities of lenders in the informal sector.
2. Informal lenders charge very high interest on their loAnswer: They try to charge more and more interest on their loans as there are no boundaries and restrictions.
3. Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
4. In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of borrower. This could lead to increasing debt and debt trap, therefore the credit activities of the informal sector should be discouraged.

Question 32.
Why do we need to expand formal sources of credit in India? (NCERT Question)
Answer:

1. There is no organisation that supervises the credit activities of lenders in the informal sector. They lend at whatever interest rate they choose.
2. No one can stop rural money-lenders from using unfair means to get their money back.
3. Informal lenders charge a very high rate of interest on loans and as a result a larger part of the earnings of the borrowers and farmers are used to pay the loans.
4. The amount to be repaid is often greater than income, and farmers and other borrowers in villages fall in a debt trap.
   Thus, it is necessary that banks and co-operatives increase their lending, particularly in rural areas, so that dependence on informal sources of credit ends.

Long Answer Questions (LA) 5 Marks

Question 33.
What is the basic objective of ‘Self Help Groups’? How do they work? Describe any four advantages of ‘Self Help Groups’ for the poor. (2015 D, 2011 D)
Answer:
The basic objective of ‘Self Help Groups’ is to organize rural poor, particularly women belonging to one neighbourhood into small Self Help Groups (15-20 members). These members save regularly and the amount varies from ₹25-100 or more depending upon their ability to save.
The four advantages of ‘Self Help Groups’ are as follows:

1. The members can take small loans from the group itself to meet their needs. The group charges interest on these loans which is still less than what moneylenders charge.
2. After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank which is sanctioned in the name of the group to create self employment opportunities. All important decisions regarding loan, purpose, amount of interest, non-payment of loan are taken by the group members.
   For instance, small loans are provided to the members for releasing mortgaged land, meeting working capital needs, for acquiring assets like sewing machines, handlooms, cattle etc.
3. Since non-repayment of loans is dealt with seriously by group members, therefore banks are willing to lend to the poor women when organized in SHGs, even though they have no collateral as such. Thus, the SHGs help women to become financially self reliant.
4. The regular meetings of the group provide a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence etc.

Question 34.
‘Banks and cooperatives help people in obtaining cheap and affordable loans’ Which values according to you does this support? (2011 OD)
Answer:
Cheap and affordable loans help people to grow crops, do business, set up small scale industries or trade in goods.
This promotes:

1. Self reliance and financial security and independence of people.
2. Protection of the relatively poor against corrupt moneylenders.
3. Eradication of poverty in general.
4. All this indirectly helps in the country’s development.

Question 35.
What is Credit? Why is cheap and affordable credit important for the country’s development? Give four reasons. (2012 D)
Or
What is credit? Explain with an example, how credit plays a vital and positive role for development. (2014 OD)
Answer:
Credit means loans. It refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future repayment.

1. Cheap and affordable credit is crucial for the country’s growth and economic development. Credit is in great demand for various kinds of economic activities—big or small investments, to set up business, buying cars, houses, etc.
2. In rural areas credit helps in the development of agriculture by providing funds to farmers to buy seeds, fertilizers, expensive pesticides.
3. Manufacturers need credit for buying raw material or to meet ongoing expenditure of production. Credit helps in the purchase of plant, machinery, equipment, etc.
4. Some people may need to borrow for illness, marriages etc.
   Thus, cheap and affordable credit is crucial for the country’s growth and economic development.

Question 36.
What are the two categories of sources of credit? Mention four features of each. (2013 OD)
Answer:
The two sources of credit are formal sources and informal sources:
Formal sources of credit:

1. Banks and cooperative societies fall under the formal sector. One can obtain loans from banks or cooperative societies.
2. The Reserve Bank of India supervises the functioning of formal sources of loAnswer:
3. Bank loans require documentation and collateral (collateral is an asset such as land, building, vehicle, livestock, deposits with the bank, etc.). This is used as a guarantee to the lender until the loan is paid back.
4. Formal sources cannot charge any rate of interest from the borrowers according to their whims.
   Informal sources of credit:
   • In the informal sector money can be borrowed from a person, friend, relative, moneylender, traders, employers, etc.
   • There is no organization that checks or supervises the activities of lenders in the informal sector.
   • Loans from informal sources do not require any such collateral.
   • They charge a very high rate of interest on loans as they do not require any collateral.

Question 37.
Which government body supervises the functioning of formal sources of loans in India? Explain its functioning. (2012 OD)
Answer:
The Reserve Bank of India supervises the functioning of formal sources of loans.
Functions of Reserve Bank of India.

1. RBI requires commercial banks to maintain a minimum cash balance out of the deposits they receive. The RBI monitors that the banks actually maintain the cash balance.
2. RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small-scale industries, small borrowers, SHGs, etc.
3. RBI issues guidelines for fixing rate of interest on deposits and lending by commercial banks.
4. Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.

Question 38.
What are the various sources of credit in rural areas? Which one of them is the most dominant source of credit and why? (2013 D)
Answer:
Moneylenders are the most dominant amongst sources of credit for rural households. They constitute an informal source of credit. They charge a very high rate of interest on loans as they do not require any collateral. They are the most convenient source of credit in the rural areas.
Other sources of rural credit:

1. Cooperative Societies are another major source of rural credit. They are a source of formal sector credit. Members of a Cooperative pool their resources for helping one another, e.g., Farmers’ Cooperatives, Weavers’ Cooperatives, etc. They offer cheap credit in rural areas for their members. Once these loans are repaid, another round of loans is offered.
2. Agricultural traders, relatives and friends are other informal sources of rural credit. Some farmers borrow from agricultural traders who supply the farm inputs (such as seeds, fertilizers, pesticides, etc.) on credit at the beginning of the cropping season and repay the loans after the harvest.
3. Commercial banks also give loans to rural households. However, not many rural households borrow from banks as they require proper documentation and collateral.

Question 39.
“Deposits with the banks are beneficial to the depositors as well as to the nation”. Examine the statement. (2016 OD, 2015 D)
Answer:
Benefit of deposits to the depositors:

1. Bank accepts the deposits and pays interest to the depositor.
2. Banks help people save their money and keep their money in safe custody of the bank.
3. People can withdraw the money as and when they require.
4. Banks also grant loans to people for a variety of purposes. In times of need, individuals, business houses and industries can borrow money from the banks.

Benefit of deposits to the Nation:

1. Banks use the major proportion of the deposit to extend loans.
2. There is a huge demand for loans for various economic activities. In times of need, business houses and industries can borrow money from the banks.
3. Banks mediate between those who have surplus funds and those who are in need of these funds. Thus, it helps in the economic development of the Nation.

Question 40.
How do banks play an important role in the economy of India? Explain. (2015 OD)
Answer:

1. Banks help people to save their money and keep their money in safe custody. To ensure safety of their money, people deposit their money with banks. Banks accept deposits and pay interest on deposits. People have the provision to withdraw their money as and when they require.
2. Banks also grant loans to people for a variety of purposes. In times of need individuals, business houses and industries can borrow money from the banks.
3. Credit provided by banks is crucial for the country’s growth and economic development. Credit is needed for all kinds of economic activities, to set up business, buy cars, houses, etc.
4. Banks also help people in obtaining cheap and affordable loans. This can help people to grow crops, do business, set up small-scale industries or trade in goods and also help indirectly in the country’s development. They should do so, so that relatively poor people do not have to depend on informal sources of credit (money-lenders).

Question 41.
Describe the vital and positive role of credit with examples. (2016 D)
Answer:
In the festive season, a shoe manufacturer, Ram receives an order from a large trader in town for 3,000 pairs of shoes to be delivered in a month’s time. To complete production on time Ram has to hire workers for stitching and pasting work. He has to purchase the raw materials. To meet these expenses Ram obtains loans from two sources.

First, he asks the leather supplier to supply leather now and promises to pay him later.

Second, he obtains loan in cash from the large traders as advance payment for 1000 pairs of shoes with a promise to deliver the whole order by the end of the month.

At the end of the month, Salim is able to deliver the order, make a good profit and repay the money he had borrowed.

Salim obtains credit to meet the working capital needs of production. The credit helps him to meet the ongoing expenses of production, complete production on time and thus increase his earnings. Credit therefore plays a vital and positive role in this situation.

Question 42.
How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures. (2016 OD)
Answer:
Formal sector loans can be made beneficial for poor farmers and workers in the following ways:

1. Create greater awareness among farmers about formal sector loans.
2. Process of providing loans should be made easier. It should be simple, fast and timely.
3. More number of Nationalized Banks/cooperative banks should be opened in rural sectors. Banks and cooperatives should increase facility of providing loans so that dependence on informal sources of credit reduces.
4. The benefits of loans should be extended to poor farmers and small scale industries.
5. While formal sector loans need to expand, it is also necessary that everyone receives these loans. It is important that formal credit is distributed more equally so that the poor can benefit from cheaper loans.