NOTES Sub-Economics STD- 10

Ch.3- Money & Credit

VERY SHORT ANSWER TYPE QUESTIONS

1.Why are transactions made in money ?
Ans:Transactions are made in money because a person holding money can
easily exchange it for any commodity or service that he or she might want.
2.What is the basic feature of double coincidence of wants ? In which
system is it practiced ?
Ans:Basic feature is that both parties agree to sell and buy each other’s
commodities. It is practiced in Barter system.
3.Which are modem forms of money ? State any one.
Ans: Modern forms of money include currency- paper notes and coins.
4.Why is currency accepted as a medium of exchange ?
Ans: Because it is authorised by the government of a country e.g., Indian
Government.
5.Which authority issues currency notes in India ?
Ans:In India, Reserve Bank of India issues currency notes on behalf of
the central government.
6.Why do people deposit money with the banks ?
Ans:People deposit surplus money with the banks because in this way
their money is safe and it earns an interest too.
7.Why are deposits with the banks called demand deposits ?
Ans:Deposits with the banks are called demand deposits because they can
be withdrawn on demand.
8.What is a cheque ?
Ans: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.
9.How do the demand deposits share the essential features of money
?
Ans:The facility of cheques against demand deposits make 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.
10.Why no person can refuse to accept payments in rupee ?
Ans:No one can refuse to accept payment in rupee because it is a legal
currency authorised by the government.
11.How much amount of the deposits is kept as cash by the banks
and why ?
Ans:Banks hold about 15 per cent of their deposits as cash to pay the
depositors who might come to withdraw money from the bank on any
given day.
12.How do banks use the major portion of the deposits ?
Ans:Banks use the major portion (55%) of the deposits to extend loans to
people for various economic activities.
13.Which is the main source of income of the banks ?
Ans:The difference between what is charged from the borrowers and what
is paid to depositors is the main source of income of the banks.
14.What is credit ?
Ans: Credit (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.
15.In rural areas which is the main demand for credit ?
Ans:In rural areas, the main demand for credit is crop production and
purchase of pesticides and fertilizers.
16.What is debt-trap ?
Ans:When a borrower particularly in rural area fails to repay the loan due
to the failure of the crop, he is unable to repay the loan and is left worse
off. This situation is commonly called debt-trap. Credit in this case pushes
the borrower into a situation from which recovery is very painful.
17.What is a collateral ?
Ans:Collateral is an asset that the borrower owns (such as land, building,
vehicle, live-stocks, deposits with banks) and uses this as a guarantee to a
lender until the loan is repaid.
18.What are “terms of credit” ?
Ans:Interest rate, collateral and documentation requirement, and the mode
of repayment together comprise the terms of credit.
19.Which are the major sources of cheap credit in rural areas ?
Ans.Banks and the cooperative societies.
20.Who are the informal lenders ?
Ans:Moneylenders, traders, employers, relative and friends are the
informal lenders.
 SHORT ANSWER TYPE QIUESTIONS
1.How can money be easily exchange for goods or services? Give an
example to explain.
Ans:Transactions are made in money because a person holding money can
easily exchange it for any commodity or a service. It solves the problem
of double coincidence of wants by acting as a medium of exchange.
For example, a shoe manufacturer wants to sell shoes in the market and
wants to buy rice. Under barter system, both parties selling shoes and rice
have to agree to buy and sell each other’s commodities and this creates a
problem which is referred to as double coincidence of wants. This
problem is overcome by the introduction of money. Now, the shoe
manufacturer will sell the shoes for money and with that money he can
buy rice.
2.“The credit activities of the informal sector should be discouraged.”
Support the statement with arguments.

Ans: The credit activities of the informal sector should be discouraged

because:
There is no organisation to supervise the credit activities of the lenders in
informal sector.
The informal sector lends at a very high rate of interest and use unfair
means to get the money back.
Higher cost of borrowing means a large part of the earnings of the
borrowers is used to repay the loan. Hence, the borrowers have less
income left for themselves.
Sometimes, due to higher rate of interest, the amount to be repaid becomes
higher than the income of the borrower due to that there ig always a risk
for borrowers to fall in debt-trap.
3.“Cheap and affordable credit is crucial for the country’s
development.” Assess the statement.
Ans: Cheap and affordable credit is crucial for a country’s development
because:
More lending would lead to higher incomes and encourage people to
invest in agriculture, engage in business and set up small industries.
Cheap credit will enable more investment. This leads to acceleration of
economic activity.
Cheap credit would also allow weaker sections of society to access formal
sector of lending and get rid of from informal moneylenders.
Affordable credit would also end the cycle of debt trap.
Cheap and easy terms of credit would inspire better investment in
technology and thus increase competition.
4.“Deposits with the banks are beneficial to the depositors as well as
to the nation.”
Examine the statement
Ans: Deposits with the banks are beneficial to the depositors as well as to
the nation in various ways. Some of them are:
They provide safe and secure deposits to a person’s money.
They provide excellent saving and investment options and also help in
the growth of the nation.
They provide interests on the deposited money to the depositors.
Money can be easily withdrawn from the banks as and when required by
the depositors.
They provide easy loans on nominal rates that make it possible for the
common man to build their own assets.
 5.‘Credit has its own unique role for development.’ Justify the
statement with arguments.
Ans: Credit has a unique role in the economic development of the country.
It is needed by all the three sectors of the economy.
In urban sector, big businessmen and small manufacturers need loans
either to expand their enterprises, bring new technology or diversifying
their businesses.
In rural sector, the main demand for credit is for crop production. Crop
production involves cost of seeds, fertilizers, pesticides, water, electricity,
repair of equipments. Cheap credit would thus lead to increase in
production.
Even tertiary sector needs loans to buy the latest equipments and
technology. Thus, we can say that credit has a unique role in the
development of a country.
6. How is money transferred from one bank account to another bank
account? Explain with an example.
Ans: For payment through cheque, the payer who has an account in the
bank, draws out a cheque for a specific amount. The cheque is a statement
asking the bank to pay a specific amount from the person’s account to the
person in whose name the cheque has been issued.
For example, Aman has to pay a specific amount of money to Shruti, say
? 60,000. Aman will write a cheque in the name of Shurti. It means Aman
instructs his bank to pay the money to Shurti. Shurti will deposit the
cheque in her bank. After two or three days, the money will be transferred
from Aman’s account to Shurti’s account.
7. “Poor households still depend on informal sources of credit.”
Support the statement with examples.
Ans: Poor households still depend on informal sources of credit because:
Bank loans require proper documentation and collateral which is rarely
available with poor households.
Informal sources of credit such as moneylenders know the borrowers
personally and are often willing to give a loan without a collateral.
Sometimes, if the borrowers are unable to return the loan, they can get
additional loans from moneylenders.
8. How does money solve the problem of double coincidence of wants?
Explain with an example of your own.
Ans – ‘Double coincidence of wants’ is when whatever a person desires
to sell is exactly what the other wishes to buy. In a barter system where
goods are directly exchanged without the use of money, double
coincidence of wants is an essential feature. Money solved the problem of
double coincidence of wants because after the introduction of money,
people could use money as an intermediate to buy or sell things and no
specific buyer or seller was required for interchanging of products.
For example, a trader wishes to sell 10 sacks full of rice and expects to
get it in exchange for five sacks of cereal. To find a suitable buyer to sell
the sacks of rice in exchange for cereals would be very tough. However,
the money will solve this problem, and the trader can sell the sacks of rice
to someone who needs it and in return, buy cereals from the money he
gets from the buyer of rice.
9. How do banks mediate between those who have surplus money and
those who need money?
Ans– Banks mediate between those who have surplus funds (the
depositors) and those who are in need of funds (the borrowers) by lending
money to people who are in need.
People can open accounts in banks and banks make use of that money to
fulfil the loan requirements of the people.
A higher interest rate is charged for the borrower and that profit is given
to the depositor as interest for offering deposits.
10 .What is the basic idea behind the SHGs for the poor? Explain in
your own words.
Ans – The Self Help Groups (SHGs) have been set in India with an aim
to help the rural poor, especially women. A typical Self Help Group
comprises 15-20 people from the same neighbourhood who save some
money from their daily wages and collect them together.
People can borrow money from these groups during an emergency or
when they are in need. They charge a minimum rate of interest from the
borrowers. Once the SHG has managed to save a defined amount of
money, they are also eligible to take loans from banks.
The main purpose of introducing these Self Help Groups was to increase
small scale employment opportunities for the rural people so that they
could start a small business to earn a livelihood.
11. What are the reasons why the banks might not be willing to lend
to certain borrowers?
Ans – The reasons why banks might not be willing to lend money to
certain borrowers are given below:
Some people fail to provide the required set of documents to get a loan
Irregular wages and no fixed job is also one reason because it increases
the chances of non-repayment of loans Certain borrowers are added to the
list of NPAs. There is high risk in approving loans to entrepreneurs.
 LONG ANSWER TYPE QUESTIONS
1.Describe the vital and positive role of credit with examples.
Ans: Credit plays a vital and positive role in the following ways:
It helps people from all walks of life in setting up their business, increase
their income and provide support to their family needs.
It makes it possible for the people to own or construct their own house
and get relief from monthly rent.
People often avail themselves of credit to purchase luxury items like
vehicles, A.Cs, etc., which further raises their standard of living.
It enables us to invest in human resource. People take credit for
education, training, etc. which allows enrichment of human resource.
For example, Salim availed credit facility to meet the working capital
needs of production. It helped him to meet the ongoing expenses of
production, complete production on time, thereby, increasing his income.
2. How can the formal sector loans be made beneficial for poor
farmers and
workers? Suggest any five measures.
Ans: The formal sector loans can be made beneficial to poor farmers and
workers in following ways:
The process of providing loans should be made easier and accessible to
them.
Large number of banks and cooperatives should be opened in the rural
areas.
Banks and cooperatives should expand their facility of providing loans so
as to decrease dependence on informal sector.
Special focus should be paid on poor and small farmers along with small
scale industries. Loan processing should be simple, faster and timely.