Important Questions for Chapter 3 Money and Credit World Class 10 Economics
Important Questions1
Recognize the situation when both the parties in a barter economy have to agree to sell and buy each other‘s commodities? What is it called?
Answer
Double coincidence of wants.
VSAQ
2
What is meant by double coincidence of wants?
Answer
Both parties, the seller and they buyers have to agree to sell and buy each other commodities without use of money.
VSAQ
3
How does money eliminate the need for double coincidence of wants?
Answer
With the help of available money we can purchase anything we want.
VSAQ
4
What is Barter System?
Answer
Barter is a system of exchange in which goods are directly exchanged without the use of money.
VSAQ
5
What is a Cheque?
Answer
A Cheque is a paper instruction to the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been issued.
VSAQ
6
What are the two forms of modern currency?
Answer
Two forms of modern currency are Paper notes and Coins.
VSAQ
7
How does money act as medium of exchange?
Answer
It acts as an intermediate in the exchange process and transactions.
VSAQ
8
Who issues currency notes in India?
Answer
Reserve bank of India.
VSAQ
9
Why one cannot refuse a payment made in rupees in India?
Answer
One cannot refuse a payment made in rupees because it is accepted as a medium of exchange. The currency is authorized by the government of India.
VSAQ
10
Who supervises the functioning of formal sources of loan?
Answer
Reserve bank of India.
VSAQ
11
Why do farmers require credit?
Answer
Farmers require credit to purchase the raw material and inputs for agriculture.
VSAQ
12
Why do banks maintain cash reserve?
Answer
Banks maintain cash reserve to arrange for daily withdrawals by depositors.
VSAQ
13
How do the deposits with banks become their source of income?
Answer
Banks charge higher interest rate on loans than what they offer on deposits. The difference of interest is the main source of income of banks.
VSAQ
14
Why are most of the poor households deprived from the formal sector of loans?
Answer
Most of the poor households are deprived from the formal sector of loans because they are illiterate and also cannot fulfil the formalities of the formal sector of loans.
VSAQ
15
Why is the supervision of the functioning of formal sources of loans necessary?
Answer
It is necessary because banks have to submit information to the RBI on how much they are lending, to whom they are lending and what interest rate, etc.
VSAQ
1
How is money used as a medium of exchange? Explain with examples.
Answer
Money acts as a medium of exchange in the following ways:
• Overcomes the problem of double co-incidence of wants.
• Acts as a medium of deferred payment.
• Has a store value.
SAQ
2
What are the modern forms of money? Why are the ‘rupee’ widely accepted as a medium of exchange?
Answer
The modern forms of money are listed below:
• Paper currency
• Coins
• Demand deposits
• Cheques
SAQ
3
Why is modern currency accepted as a medium of exchange without any use of its own? Find out the reason.
Answer
Modern currency is accepted as a medium of exchange without any use of its own because:
• Modern currency is authorized by the government of a country.
• In India, the Reserve Bank of India issues all currency notes on behalf of Central Government.
• No other individual or organization is allowed to issue currency.
• The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India.
• No individual in India can legally refuse a payment made in rupees.
SAQ
4
How is money used in everyday life? Explain with examples.
Answer
In modern times, money is used as a medium of exchange because it has been authorized by the government as a currency.
SAQ
5
How does the Reserve Bank of India supervise the functioning of banks? Why it is necessary?
Answer
Reserve Bank of India (RBI) supervised the banks in the following ways:
• It monitors the balance kept by banks for day-today transactions.
• It checks that the banks give loans not just to profit- making businesses and traders but also to small borrowers.
• Periodically, banks have to give details about lenders, borrowers and interest rate to RBI.
SAQ
6
How can money be easily exchange itself for goods or services? Give example to explain.
Answer
Money acts as a medium to exchange itself for goods and services: A person holding money can purchase 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 shoemaker will first exchange shoes for money and then cam purchase 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 shoe in exchange. This process is very difficult, time consuming and unhealthy for economy.
SAQ
7
Explain with examples, how people are involved with the banks.
Answer
We know that banks accept the deposits from the people who have surplus money and also pay an interest on the deposits. But banks keep only a small
portion (15 percent in India) of their deposits as cash with themselves. This is kept as a provision to pay the depositors who might come to withdraw money from their accounts in the bank on any day. They use the major portion of the deposits to extend loans to those who need money. In this way banks mediate between those who have surplus money and those who need money.
SAQ
8
How is money transferred from one bank account to another bank account? Explain with an example.
Answer
Money transfer from one bank account to another bank account: If a person has to make a payment to his or her friend and writes a cheque for a specific amount, this means that the person instructs his bank to pay this amount to his friend. His friend takes the cheque and deposits it in his account in the bank. The amount mentioned in cheque is transferred from one bank account to another bank account.
SAQ
9
Mention three points of difference between formal sector and informal sector loans.
Answer
Formal sector loans:
• Loans from banks and cooperatives.
• Under supervision of the Reserve Bank of India.
• Reasonable rates of interest.
Informal sector loans:
• Loans from moneylenders, relatives, friend, traders, etc.
• No supervision of any institution.
• Very high rates of interest.
SAQ
10
“Poor households still depend on informal sources of credit”. Support the statement with examples.
Answer
• Banks are not present everywhere in rural India, whereas informal sources providers are easily available in all villages.
• Getting a loan from a bank is much more difficult for poor people than taking a loan from the informal resources, because bank loans require proper documents and collaterals.
• Moneylenders provide loan to the poor people without any collateral.
SAQ
11
What is meant by term of credit? What does it include?
Answer
Terms of credit are the requirements need to be satisfied for any credit arrangements. It includes interest rate, collateral, documentation and mode of repayment. However, the terms of credit vary depending upon the nature of lender, borrower and loan.
SAQ
12
Why do lenders ask for collateral while lending? Give any three reasons.
Answer
Lenders ask for collateral as security against loans. If the borrower fails to repay the loan, the lender has the right to sell the asset-or collateral to recover the payment. Collateral assets (such as land, vehicle, etc.) act as a security for the lenders in case the borrower defaults on repayment of loan. It is for this reason that lenders ask for collateral while lending.
SAQ
1
‘‘The rupee is widely accepted as a medium of exchange.’’ Explain.
Answer
The rupee is widely accepted as a medium of exchange because:
• The currency is authorised by the government of the country.
• In India, the Reserve Bank of India issues currency notes on behalf of the central government.
• The law legalises the use of rupee as a medium of payment that cannot be refused in setting transactions in India.
• No individual in India can legally refuse a payment made in rupees. Hence, the rupee is widely accepted as a medium of exchange.
LAQ
2
Why is money transaction system better than barter system? Explain with examples.
Answer
• Transaction system is better than barter system because double coincidence of wants creates problem.
• For example, shoe manufacturer wants to sell shoes in the market and wants to buy wheat. For this, he would look for a wheat growing farmer who would exchange his wheat with the shoes.
• In barter system, goods are exchanged without the use of money.
• In contrast, in an economy where money is in use. It eliminates the need for double coincidence of wants.
LAQ
3
Which types of deposits with the banks are called demand deposits? State some important features of demand deposits.
Answer
People save their money in banks by opening an account. The deposits in the bank accounts can be withdrawn on demand, so these deposits are called demand deposits.
• Banks accept the deposits and also pay an interest rate on the deposits. In this way people’s money is safe with the banks and it earns an interest.
• The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash. Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.
• It is authorised by the government of the country.
• Its demand and supply can be controlled RBI.
• In India, the law legalises the use of rupee as a medium of payment that cannot be refused in settling transaction in the country. No individual can legally refuse a payment made in rupees.
LAQ
4
How are deposits with the bank beneficial for individual as well as for the nation? Explain with examples.
Answer
The deposits with banks are beneficial for individual as well as for nation:
• Banks accept deposit and also pay an amount as interest and in this way people earn money.
• People’s money is safe with banks.
• It is easy for individuals to get credit who have savings and current account in the banks.
• Poor people who are engaged in production need credit.
• Credit provided by the banks for government projects help in development of the nation.
• Banks provide loans for the promotion of International trade.
• Development of infrastructure is undertaken with the loans provided by the banks.
(Any five)
LAQ
5
Explain the differences between Formal and Informal Sources of Credit.
Answer
Differences between Formal and informal sources of credit are as under:
Formal source Credit
• Includes banks and cooperatives
• Banks require collateral and proper documentation for getting a loan.
• A reasonable rate of interest is charged.
• Apart from profitmaking, they also have an objective of social welfare.
• Terms of credit are fair and reasonable.
• The Reserve Bank of India supervises its functioning.
Informal source Credit
• Includes moneylenders, traders, employees, friends and relatives.
• No collateral is required.
• Repeated borrowing can lead to debt trap.
• Their only motive is to extract profit as much as possible.
• They impose very tough and sometimes even unreasonable terms of credit or borrowers.
• Banks do not supervise.
LAQ
6
“Cheap and affordable credit is crucial for the country’s development.’’ Explain the statement with five points.
Answer
Credit for country development:
• Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan. Hence, borrowers have less income left for themselves.
• In certain cases, the high interest rate of borrowing can mean that the amount to be repaid is greater than the income of the borrower. This could lead to increasing debt and debt trap. For these reasons, banks and co- operative societies need to lend more.
• This would lead to higher incomes and many people could then borrow cheaply for a variety of needs.
• They could grow crops, do business, Set-up small scale industries, etc.
• They could Set-up new industries or trade goods.
LAQ
7
How do banks play an important role in the economy of India? Explain.
Answer
Banks play an important role in developing the economy of India:
• They keep money of the people in its safe custody.
• They give interest on the deposited money to the people.
• They mediate between those who have surplus money and those who are in need of money.
• They provide loan to large number of people at low interest rate.
• They promote agricultural and industrial sector by providing loans.
• They also provide funds to different organizations.
LAQ
8
How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures.
Answer
Formal sector loans can be made beneficial for poor farmers and workers in the following ways:
• Create awareness to farmers about formal sector loans.
• Process of providing loans should be made easier, simple, fast and timely.
• More number of Nationalized Banks and Cooperative banks should be opened in rural sector.
• Banks and cooperatives should increase facility of providing loans so that dependence on informal sources of credit reduces.
• The benefits of loans should be extended to poor farmers and small scale industries.
• While formal sector loans need to expand, it is also necessary that everyone receives these loans.
LAQ
9
Which are the two major sources of formal sectors in India? Why do we need to expand the formal sources of credit?
Answer
The two major sources of formal sources of credit are:
•Banks
• Cooperatives.
Need to expand formal sources of credit are:
• In order to save the poor farmers and workers from the exploitation by the informal sector credit.
• Informal sector charges a higher interest on loans which means that a large part of the earnings is used to repay the loan.
• Formal credit can fulfil various needs of the people through providing cheap and affordable credit.
LAQ
10
“Cheap and affordable credit is crucial for the country’s development.’’ Explain the statement with five points.
Answer
Credit for country development:
• Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan. Hence, borrowers have less income left for themselves.
• In certain cases, the high interest rate of borrowing can mean that the amount to be repaid is greater than the income of the borrower. This could lead to increasing debt and debt trap. For these reasons, banks and co-operative societies need to lend more.
• This would lead to higher incomes and many people could then borrow cheaply for a variety of needs.
• They could grow crops, do business, Set-up small scale industries, etc.
• They could Set-up new industries or trade goods.
LAQ
11
How do banks play an important role in the economy of India? Explain.
Answer
Banks play an important role in developing the economy of India:
• They keep money of the people in its safe custody.
• They give interest on the deposited money to the people.
• They mediate between those who have surplus money and those who are in need of money.
• They provide loan to large number of people at low interest rate.
• They promote agricultural and industrial sector by providing loans.
• They also provide funds to different organizations.
LAQ
12
How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures.
Answer
Formal sector loans can be made beneficial for poor farmers and workers in the following ways:
• Create awareness to farmers about formal sector loans.
• Process of providing loans should be made easier, simple, fast and timely.
• More number of Nationalized Banks and Cooperative banks should be opened in rural sector.
• Banks and cooperatives should increase facility of providing loans so that dependence on informal sources of credit reduces.
• The benefits of loans should be extended to poor farmers and small scale industries.
• While formal sector loans need to expand, it is also necessary that everyone receives these loans.
LAQ
13
Why is it necessary for banks and cooperatives to increase their lending in rural areas? Explain.
Answer
Necessity for the banks and cooperative societies to increase their lending facilities in rural areas:
• Dependence on informal sources of credit reduces.
• To provide more loan facilities to rural households.
• To save rural people from exploitation.
• It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.
• The bank and the cooperative societies have to increase the lending facilities to improve the livelihood of the people in the rural areas.
LAQ
14
“Most of the poor households are still dependent on informal sources of credit.’’ Explain the statement.
Answer
• Banks are not present everywhere in rural India, whereas informal sources are easily available in all villages.
• Getting a loan from a bank is much more difficult for poor people than taking a loan from the informal resources, because bank loans require proper documents and collaterals.
• Moneylenders provide loan to the poor people without any collateral.
• Formal sources provide loan only for productive purposes, whereas the informal sources provide credit for productive and non-productive purposes.
LAQ
15
Describe the vital and positive role of credit with examples.
Answer
‘Credit’ refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.
Credit plays a vital and positive role as:
• Credit helps people from all walks of life in setting up their business, increase their income and support their families.
• To some people loan helps a lot in constructing their houses and get relief from monthly rent.
• To others it helps a lot in raising their standards. Example of Salim: The credit helps him and he is able to increase his earnings.
LAQ
1
How do banks mediate between those who have surplus money and those who need money?
Answer
• Banks keep small proportion of their deposit as cash with themselves.
• Major portion of deposit is used for extending loans.
• The banks mediate between depositors and borrowers in this way.
• They charge high rate of interest on loans than what they offer on deposits.
HOTS
2
“The credit activities of the informal sector should be discouraged.” Support the statement with arguments.
Answer
The credit activities of the informal sector should be discouraged because:
• 85% of loans taken by the poor households in the urban areas are from informal sources.
• Informal lenders charge very high interest on their loans.
• There are no boundaries and restrictions.
• Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
• In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower.
• This could lead to increasing debt and debt trap, therefore the credit activities of the informal sector should be discouraged.
HOTS
3
Formal credit meets only about half of the total credit needs of the rural people. Where does the other half come from?
Answer
• The remaining credit needs are met from informal sources. Compared to formal lenders, most of the informal lenders charge much higher interest rates on loans.
• Besides the high interest rate, informal lenders impose various other tough conditions. For example, they make the farmers promise to sell the crop to him at a low price. There is no such condition in formal sector.
• Loans taken by poor people from informal lenders sometimes, lead them to debt trap because of high interest rate.
• The formal sources of credit in India still meets only about half of the total credit needs of the rural people.
HOTS