Class 10, NCERT (CBSE) Social Science Economics

Understanding Economic Development

Chapter 3, MONEY AND CREDIT
Sample and Intext Questions (Study Material)

Q.1: What is money ?

Ans: Money is a medium of exchange and measure of value.
Q.2: What are the different kinds/types/forms of money ?
Ans: Money can be classified into the following types or forms:
(i) Coins such as gold, silver, copper coins. (ii) Paper notes, (iii) Fiat money, (iii)
Credit money or deposits with Banks, and (iv) Commodity money in the form of
grains, cattle etc.
Q.3: What is the meaning of “double coincidence of wants” ?
Ans: When two parties agree to sell and buy each others commodities, this situation
is known as double coincidence of wants. That is, what a person desires to sell is
exactly what the other wishes to buy. In a barter system, where goods are directly
exchanged for another type of goods or service without the use of money, double
coincidence of wants is a must.
Q.4: What is “Barter System” ?
Ans: It is the system in which one type of goods or service is directly exchanged for
another type of goods or service without the use of money. Double coincidence of
wants is an essential feature of this system. Before the evolution of money,
exchange was done through this system.
Q.5: Why money is called a medium of exchange?
Ans: Since money acts as an intermediate in the exchange process, it is called a
medium of exchange.
Q.6: Define - (a) Credit (b) Terms of Credit (c) Collateral (d) Fiat Money (e) Cheque
(f) Demand Deposits
Ans:
Credit : Credit or Loan 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 is a crucial element in economic life and plays an important role in the
development of the country.
Terms of Credit : The interest rate, collateral, documentation requirement and the
mode of payment are the various factors which together comprise the “Terms of
Credit”.
Collateral : Collateral is an asset that the borrower owns and uses this as a
guarantee to a lender until the loan is repaid. Collaterals can be land, building,
vehicle, stocks, cattle, bank deposits etc.
Fiat Money : The „Fiat Money‟ is meant for that money which serves as money on
the basis of fiat or order of government.
Cheque : A cheque is a paper instructing the bank to pay a specific amount from the
person‟s account to the person in whose name the cheque has been made.
Demand Deposits : The deposits in the bank account which can be withdrawn on
demand are known as „Demand Deposits‟.
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Q.7: How does the use of money make it easier to exchange things ?
Ans: As we know, in a barter system where goods are directly exchanged without the
use of money, double coincidence of wants is a necessary condition. By serving as a
medium of exchange, money removes the need for double coincidence of wants and
the difficulties associated with barter system. In this way, the use of money makes it
easier to exchange things.
Q.8: Can you think of some examples of good services being exchanged or wages
being paid through barter ?
Ans: Yes, in rural areas generally crops and foodgrains are directly exchanged
without the use of money. Similarly, agricultural labourers are normally paid not in
cash but in kind, e.g. 5kg. wheat or rice per day.
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Q.9: Mr. Salim wants to withdraw Rs 20,000 in cash for making payments. How
would he write a cheque to withdraw money ?
Ans: Mr.Salim would write date on the space given. He would instruct the bank to
pay „Self‟ and also write „Twenty thousands only‟ further to Rupees and fill up the
amount and account number e.g. „20000/-„etc. at the proper spaces as mentioned
over the cheque. Then he would have to put his signature on the right hand lower
side of the cheque. Now he would submit it on the counter of the bank. Q.10: Why
were demand deposits considered as money ?
Ans: Since demand deposits are accepted widely as a means of payment along with
currency, they are also considered as money in the modern economy.
Intext Questions
Q.11: What would happen if all the depositors went to ask for their money at the
same time ?
Ans: Bank would not be able to give money to the depositors if they all went to ask
for their money all at the same time. This is because, banks keep only about 15%
and would have already used the balance d portion of their deposits to extend
loans.
Q.12: What were the reasons that make Swapna‟s situations so risky ? Discuss
factors: pesticides, role of money lenders, climate.
Ans: Pest attack, exploitation by money lenders and lack of monsoon are the
reasons that make Swapna‟s situation so risky.
Pesticides – Pest attack can be controlled by pesticides.
Role of Moneylenders – Generally moneylenders exploit farmers. They charge very
high rate of interest and keep them in debt-trap.
Climate – Nearly 60% of our agricultural land area are still un-irrigated. Our farmers
heavily depend on rainfall. So, climate plays a vital role in agriculture.
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Q.13: Why do lenders ask for collateral while lending ?
Ans: 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.
Q.14: Given that a large number of people in our country are poor, does it in any way
affect their capacity to borrow?
Ans: Lenders ask for collateral as security against loans. If the borrowers fail to
repay the loan, the lender has the right to sell the asset or collateral to recover the
loan amount.
Q.15: Fill in the blanks choosing correct option from the brackets:
While taking a loan, borrowers look for easy terms of credit. This means _________
(low/high) interest rate, ______ (easy/tough) conditions for repayment,
____________ (less/more) collateral and documentation requirements.
Ans: low, easy, less.
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Q.16: List the various sources of credit in Sonpur.
Ans: The various sources of credit in Sonpur are –
1. village moneylender
2. agricultural trader
3. landowner-employers.
4. bank.
Q.17: Why will Arun have higher income from cultivation compared to Shyamal ?
Ans: Arun will have higher income from cultivation compared to Shyamal. This has
following reasons:
1. Arun has 7 acres of land compared to 1.5 acres land of Shyamal.
2. Arun received bank loans at an interest rate of only 8.5% per annum. On the other
hand Shyamal has received loan at an interest rate of 36% per annum which is much
higher than Arun‟s.
3. Arun has to repay loan anytime in the next three years while Shyamal will have to
repay within 3-4 months.
4. Shyamal received loan under the condition that he will sell the crop to the trader at
a lower price than the market price while there no such condition with Arun.
Q.18: Can everyone in Sonepur get credit at a cheap rate ? Who are the people who
can ?
Ans: No, everyone in Sonepur can not get credit at a cheap rate. This is because,
collateral is required for taking bank loan at cheap rate.
Only those people, who can fulfill collateral and documentation requirements, get
credit from bank at a much rate.
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Q.19: What are the differences between formal and informal sources of credit ?
Ans: The various differences between formal and informal sources of credit are
shown in the following table:

Formal Sources of Credit Informal Sources of Credit

1. They cover those sources of credit 1. They include those small and scattered
which are registered by the units which are outside the control of the
Government and have to follow its Government e.g. individual
rules and regulations e.g. Banks, moneylenders, traders, employers, etc.
Cooperatives. 2. There is no organizational supervision or
2. The RBI supervises the functioning adherence to rules and regulations in the
of formal sources of credit. credit extending activities in this sector.
3. Apart from profit-making, they have 3. Their only motive is to extract profit as
also an objective of social welfare. much as possible.
4. The rate of interest charged by formal 4. They charge random and much higher
sources is always much lower than interests in comparison to formal sectors.
that of informal sources. 5. They impose very tough and sometimes
5. The terms of credit are also fair and even, unreasonable terms of credit on the
reasonable. borrower.

Q.20: Why should credit at reasonable rates be available for all ?

Ans: Credit should be available at reasonable rates for all as other wise it will not be
useful for the borrower. Higher cost of borrowing means a larger part of the earnings
of the borrowers is used to repay the loans. Credit given at high interest rate can
sometimes result into the amount to be repaid is greater than the income of the
borrower. This could lead to increasing debt and debt-trap as we saw for Rama in
Sonpur.
Credit is a crucial element in economic activities. It has a major role in the
development of the country as it helps people in setting up their business, in
increasing their earnings and social status. Therefore, cheap and affordable credit is
crucial for the country‟s development.
Q.21: Why do you think that the share of formal sector credit is higher for the richer
households as compared to the poorer households ?
Ans: Undoubtedly, the share of formal sector credit is for the richer households as
compared to the poorer households. It is because; poverty affects poor households‟
capacity to borrow. Formal sector credit requires proper documents and collateral as
security against loans. But poor people lack in providing such things which affect
their capacity to get loans from formal sector.
That is why, the formal sector are sometimes, unwilling to lend to poor households
and thus, their share of formal sector credit is lower than the rich households.