D.A.V.

SCHOOL
SREE NANDEESWARAR CAMPUS
ADAMBAKKAM. CHENNAI 600 O88
STD: X SUB : ECONOMICS
L.No.3 MONEY AND CREDIT
I)ANSWER THE FOLLOWING:
1.Why are transactions made in money?
ANS:
I. Transactions are made in money because it is easily acceptable.
II. A person holding money can easily exchange it for any commodity or service that
he/she might want.

2. What is barter system?

ANS:
Barter is a system of exchange in which goods are directly exchanged without the
use of money.

3.What is the most essential feature of the Barter System?

ANS:
The most essential feature of the barter system is Double Coincidence of wants.

4.What is meant by double coincidence of wants?

ANS:
Both parties have to agree to buy and sell each other’s commodities. This is known
as double coincidence of wants.
5. How does money act as a medium of exchange?

ANS:
It acts as an intermediate in the exchange process and transactions. We can buy
things if we have money in our pocket.

6. Give an example to show that double coincidence of wants is necessary in barter

system.

ANS:
i. A shoe manufacturer wants to sell shoes in the market and buy wheat.
ii. The shoe manufacturer will exchange shoes for wheat without the use of money.
iii. What a person wishes to sell is exactly what the others wishes to buy.
iv. It is very difficult to look for a wheat growing person who not only wants to sell
wheat but want to buy shoes in exchange.
v. Both the parties have to agree to buy and sell each other’s commodities.

7.How can the problem of double coincidence of wants be solved?

ANS:
I. Money solves the problem by acting as a medium of exchange.
II. Under barter system both parties have to agree to buy and sell each other’s
commodities, and this problem can be overcome by introducing money.
III. Now the shoe manufacturer will sell shoes that he had produced for money and
exchange money for wheat.

8. What are the functions of money?

ANS:
FUNCTIONS OF MONEY
I. Medium of exchange.
II. Measure of value.
III. Store of value.
IV. Standard of deferred payment (future payment).

9. Mention any three limitations of barter system.

ANS:
I. Two people with different type of needs and goods must be there to satisfy each
other’s needs.
II. There are many products which cannot be divided.
III. Valuation of goods is very difficult.
10. What are the modern forms of money? How is it different from traditional forms of
money?

ANS:
I. Paper currency, coins, demand deposits, cheques constitute the modern forms of
money.
II. Traditional forms of money include gold and silver coins which had its own value
whereas modern currency is without any use of its own.

11.Why is modern currency accepted as a medium of exchange without any use of its
own? Find out the reason.

ANS:
I. Modern currency is accepted as a medium of exchange without any use of its own
because it is authorised by the government of the country.
II. In India, the Reserve Bank of India issues currency notes on behalf of the central
government.
III. As per Indian law, no other individual or organisation is allowed to issue currency.
IV. The law legalises the use of rupee as a medium of payment that cannot be refused
in settling transactions in India.
V. No individual in India can legally refuse a payment made in rupees.

12. What are Demand Deposits? What are its advantages?

ANS:
The deposits in the bank accounts can be withdrawn on demand, these
Deposits are called demand deposits.

ADVANTAGES:
I. Banks accept deposits and also pay an amount as interest on the deposits.
II. In this way, people’s money is safe with the banks.
III. The facility of cheques against demand deposits makes it possible to directly settle
the payment without the use of cash.

13. Why are the demand deposits considered as money?

ANS:
Demand deposits are considered as money for the following reasons:
I. They can be withdrawn from the bank whenever it is so required.
II. They are widely accepted as a means of payment, along with the currency, hence
they are considered as money.
III. They are accepted widely as means of payment by way of a cheque instead of cash.
Thus, they are also considered as money in the modern economy.
 14. What is a cheque? What are its advantages?

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 issued.
ADVANTAGES:
I. It is more convenient than carrying cash around.
II. Payment can be stopped if necessary.
III. Cheques are safer if crossed.
IV. A cheque can be drawn up anytime.
V. One does not have to count notes and risk making counting mistakes.

15.What does the bank do with the deposits which they accepts from the public?
ANS:

I. Banks hold only a small proportion (15%) of their deposits as cash with themselves.
II. This is kept as provision to pay the depositors who might come to withdraw money
from the bank on any given day.
III. Banks use the major portion of the deposits to extend loans. There is a huge
demand for loans for various economic activities.
IV. Banks make use of the deposits to meet the loan requirements of the people.
V. In this way, banks mediate between those who have surplus funds (the depositors)
and those who are in need of these funds (the borrowers).
VI. Banks charge a higher interest rate on loans than what they offer on deposits.
VII. The difference between what is charged from borrowers and what is paid to
depositors is their main source of income.

16. What is credit?

ANS:
Credit is an agreement in which the lender supplies the borrower with money,
goods and services in return for the promise of future payment.

17. What is a debt trap? Mention any two factors responsible for debt trap?

ANS:
It is a situation in which credit pushes the borrower into a situation from which
recovery is painful.
FACTORS:
I. Failure of crops.
II. Using the credit for non-productive purposes.
18. What is collateral?

ANS:
Collateral is an asset that the borrower owns (such as land, building, vehicles,
livestocks, deposits with banks) and uses this as a guarantee to a lender until the loan is
repaid.

19. Define terms of credit.

ANS:
I. Interest rate, collateral and documentation requirement and the mode of
repayment together comprise what is called the terms of credit.
II. It varies substantially from one credit arrangement to another.
III. They may vary depending on the nature of the lender and the borrower.

20. Why do lenders ask for collateral while lending?

ANS:
I. To safeguard his money, lenders ask for collateral (security) in the form of asset or
ownership papers as a guarantee against the loan.
II. Without security a lender may face problems if the borrower fails to repay the loan
and he has to suffer huge loss.
III. Taking something as a collateral puts the lender in the safer side. If the borrower
fails to repay the loan, the lender has the right to sell the asset or collateral to
obtain payment.

21.Why are terms of credit required for a loan or credit?

ANS:
I. Terms of credit are required so that the borrower knows the condition to take the
loan.
II. Collateral in the form of security or guarantee is given to the lender until the loan
has repaid.
III. If the borrower fails to repay the loan the lender has the right to sell an asset or
collateral to obtain payment.
22. Differentiate between formal and informal sources of credit.

ANS:

FORMAL SOURCES OF CREDIT INFORMAL SOURCES OF CREDIT

Formal sources of credit are loans Informal sources of credit are

1. from banks and cooperative moneylenders, traders, employers,
societies. relatives, friends, etc.

Reserve Bank of India supervises the There is no organisation that manages or

2. functioning of formal sources of check the credit activities performed by
credit. informal services.

Rate of interest is common and fixed Rate of interest depends upon the choice of
3. for all formal sources and borrowers. moneylenders.

Formal sources of credit need to Informal sources of credit are flexible in

4. satisfy all the terms of credit. terms of credit.

They provide cheap and affordable They generally charge higher rate of
5. credit for both urban and rural interest.
borrowers.

6. Timely loan is not possible. Timely loan is possible.

23. In what ways does RBI supervise the functioning of Bank?
(OR)
“RBI plays a crucial role in controlling the formal sector loans “. Explain
(OR)
Which government body supervises the functioning of formal sources of credit or
loan in India?

ANS:
1. Formal sources of credit work under the supervision of the Reserve Bank of India
(RBI).
2. All the commercial banks maintain a minimum cash balance out of the deposits
they receive.
3. The RBI monitors that the Banks maintain the cash balance.
4. The RBI monitors that the banks give loans not just to profit making businesses
and traders but also to small cultivators, small scale industries, to small borrowers
etc.
5. Periodically, banks have to submit information to the RBI on how much they are
lending, to whom, at what interest rate, etc.
6. The rate of interest of the formal lenders is decided by the RBI, it makes sure that
the loans from the banks are affordable and cheap.

24. Why do we need to expand formal sources of credit in India?

(OR)
“Cheap and affordable credit is crucial for the country’s development”. Explain.
ANS:
I. Moneylenders charge very high rate of interest. The higher cost of borrowing
means a larger part of the earnings of the borrowers is used to repay the loan.
II. This could lead to increase in debt and eventually into a debt trap. Affordable
credit would also end the cycle of the debt trap.
III. People who might wish to start an enterprise by borrowing may not do so
because of high cost of borrowing. Cheap and affordable credit would lead to
higher income.
IV. Many people could borrow for a variety of needs. It encourages people to invest
in agriculture, do business and set up small scale industries etc. which will lead
to the acceleration of economic activities. Thus, cheap and affordable credit is
crucial for country’s development.
25. “Most of the poor households are still dependent on informal sources of credit”.
Explain the statement.

ANS:
I. Banks are not present everywhere in rural India, whereas informal sources
are easily available in all villages.
II. Getting a loan from a bank is much more difficult for poor people than taking
a loan from the informal sources, because bank loans require proper
documents and collateral.
III. Moneylenders provide a loan to poor people without any collateral.
IV. Formal sectors provide loan only for productive purposes, whereas the
informal sources provide credit for productive and non-productive
purposes.
V. Other informal sources of credit are friends and relatives or traders and
landlords, who know the borrowers personally and therefore do not
demand collateral.

26. Analyse the role of credit for development.

ANS:
I. It helps in increasing the economic activities of the country.
II. Farmers can purchase modern inputs like fertilizers, seeds, pesticides and
machines with credit.
III. Traders and businessmen can expand their business through credit.
IV. It can further improve the standard of living.

27. How are cooperatives functioning in the rural areas to solve the problem of credit?

ANS:
I. Besides bank, the other major source of cheap credit in rural areas are the
cooperative societies.
II. Members of cooperatives collect their resources for cooperation in certain
areas. It accepts deposits from its members in certain areas.
III. With these deposits as collateral, the Cooperative has obtained a large loan
from the bank.
IV. These funds are used to provide loans to members. Once these loans are
repaid, another round of lending can take place.
28. Discuss about Krishak cooperative societies.

ANS:
I. Krishak Cooperative functions in a village. It has 2300 farmers as members.
It accepts deposits from its members.
II. With these deposits as collateral, the cooperative has obtained a large loan
from the bank. These funds are used to provide loans to members.
III. Once these loans are repaid, another round of lending can take place.
IV. It provides loans for the purchase of agricultural implements, loans for
cultivation and agricultural trade, fishery loans, loans for construction of
houses and for a variety of other expenses.

29. Explain SHG. What is the idea behind forming SHG? Explain its function.

ANS:
I. A typical SHG has 15-20 members, usually belonging to one neighbourhood.
II. The main motive of SHG is to collect savings from the poor people.
III. The saving per members varies from Rs.25 to Rs. 100or more depending on
the ability of the people and the strength of the group.
IV. SHG provides loan to their members at a reasonable cost. After a year or
two, if the group is regular in savings it becomes eligible for a bank loan.
V. Loan is sanctioned in the name of the group with the main motive of creating
self-employment opportunities for the members.
VI. In recent years, many commercial and cooperative banks have provided
loans to SHG’s for realising land from mortgage, for meeting the working
capital needs, to acquire the assets etc.
VII. The most important feature of an SHG is that these groups are organised by
women and helping women to become financially self-reliant.
VIII. The regular meeting of the group provides a platform to discuss and act on
a variety of social issues such as health, nutrition, domestic violence etc. So,
they are the building block organisation of rural poor.
30. Write a note on Bangladesh Grameen Bank.

ANS:
I. Grameen Bank of Bangladesh is one of the biggest success stories in reaching
the poor to meet their credit needs at reasonable rates.
II. Micro finance organisations and community development banks extend
small loans known as micro credit to the impoverished without collateral.
III. In 1998, low cost housing program won the “World Habitat Award”, which
was started in the 1970.
IV. Micro credit or loans are based on the concept that the poor’s skill that are
to be enriched with an incentive that they can earn more money.
V. Grameen Bank was founded by Professor Muhammad Yunus in 1970’s.
VI. In 2014, it had over 8.63 million borrowers in about 81,390 villages spread
across Bangladesh.
VII. Almost all of the borrowers are women and belong to poorest sections of
the society.
VIII. These borrowers have proved that not only are poor women reliable
borrowers, but that they can run a variety of small income – generating
activities successfully.

31.Look at a 10 – rupee note. What is written on the top? Can you explain the statement?

ANS:
“Reserve Bank of India” and “Guaranteed by the central Government” are written
on the top. In India, Reserve Bank of India issues currency notes on behalf of the Central
Government. The statement means that the currency is authorized or guaranteed by the
Central Government. That is, Indian law legalizes the use of rupee as a medium of
payment that cannot be refused setting transaction in India.

*****************************