Multiple Choice Questions (MCQs)

1. A porter making pots, wants to exchange pots for wheat. Luckily, he meets a
farmer who has wheat and is willing to exchange it for pots. What is this situation
known as?
a) Incidence of wants
b) Double incidence of wants
c) Barter system of wants
d) None of the above
2. What is the primary function of money?
a) Medium of exchange
b) Standard of deferred payments
c) Credit creation
d) All of the above
3. Find the Incorrect option
a) Demand deposit share the essential features of money
b) With demand deposit payments can be made without cash
c) Demand deposits are a safe way of money transformation
d) Demand deposit facility is like a cheque
4. Credit (loan) refers to an agreement in which the lender supplies the borrower
with money, goods, or services in return for the promise of _____.
a) Future payment
b) Payment made
c) No payment
d) Collateral
5. Which one of the following options describes ‘Collateral’?
a. Double coincidence of wants
b. Certain products for barter
c. Trade in barter
d. Asset as a guarantee for a loan
6. Rohan has taken a loan of Rs.5 lakhs from the bank to purchase a house at a
12% rate of interest. He has to submit papers about the new house and salary
records to the bank. What is this process called?
a. Interest Rate
b. Collateral
c. Principal Amount
d. Installments
7. Rita has taken a loan of Rs.7 lakhs from the bank to purchase a car. The annual
interest rate on the loan is 14.5 percent and the loan is to be repaid in 3 years in
monthly installments. The bank retained the papers of the new car as collateral,
which will be returned to Rita only when she repays the entire loan with interest.
Analyze the loan information given above, considering one of the following
correct options.
a) Mode of re-payment
b) Terms of credit
c) Interest on loan
d) Deposit criteria
8. Mohan is an agricultural laborer. There are several months in a year when he
has no work and needs credit to meet his daily expenses. He depends upon his
employer, the landowner for credit who charges an interest rate of 5 percent per
month. Mohan repays the money by working physically for the landowner on his
farmland. Over the years his debt will –
a) Increase – because of increasing interest and non-payment of the monthly
amount
b) Remain constant – as he is working for the employer but is repaying less
c) Reduce – as the amount equivalent to his salary is being counted as
monthly repayment
d) Be totally repaid – as he is repaying the debt in the form of physical labor
9. Most agricultural laborers like Mohan depend upon loans from the informal
sector. Which of the following statements about this sector is correct –
a) There is govt. bodies to supervise the informal sector
b) Money lenders ask for a reasonable rate of interest
c) Cost of informal loans to the borrower is quite high
d) Money lenders use fair means to get their money back
10. In India, who issues the currency notes on behalf of the central government?
a) Reserve Bank of India
b) State Bank of India
c) Finance Minister of India
d) None
11. In SHGs most of the decisions regarding savings and loan activities are taken by
_____.
a) Bank
b) Members
c) Government organization
d) LIC

Answer Key
1. b 2. a 3. d
4. a 5. d 6. b
7. b 8. a 9. C
10. a 11. b
 12. What do you understand by the Double Coincidence of Wants?
Ans. The condition when both parties in a barter economy agree to sell and buy each
other’s commodities is known as a double coincidence of wants.
13. What is the Barter system? What are the limitations of the Barter system?
Ans. Barter system: It is a system in which goods, property, services, etc. are exchanged
for other goods without the use of money.
Limitations of the Barter system:
i. Both parties have to agree to buy and sell each other’s commodities.
ii. Valuation of all goods cannot be done easily.
iii. There are certain products that cannot be divided.
14. What is money? How does money eliminate the need for a double
coincidence of wants?
b. Why is money called a medium of exchange?
Ans. a. Money is a medium of exchange that is widely accepted in transactions for
goods and services. It can take many forms, such as currency, coins, bank deposits,
and digital currency.
Money acts as an intermediate in the exchange process and thus eliminates the need
for

b. Money acts as an intermediate in the exchange process.

15. What are the two forms of modern currency? Why is the modern currency
accepted as a medium of exchange?

Ans. Two forms of modern currency are

 Paper notes

 Coins

Modern currency is accepted as a medium of exchange because:

i. Modern currency is authorized by the government of the country.

ii. The law legalizes the use of rupees in India as a medium of payment and it
cannot be refused in doing transactions in India.

iii. In India, the Reserve Bank of India issues currency notes on behalf of the
government.
 16. What are Demand Deposits? How is money safe in banks? Explain.

Ans. Demand deposits: The deposits in the bank accounts, which can be withdrawn
on demand, are called demand deposits.

Banks accept deposits from a number of people. Some part of that money is given
out as loans and the other part is kept with the banks for making payments. So, the
money is safe with the banks. The depositors can withdraw their money whenever
they want.

17. How are deposits with the banks beneficial for an individual as well as for
the nation? Explain with examples.
Ans. The benefits of deposits with the banks are:
i. This ensures the safety of money and they also earn interest from the bank.
ii. Demand deposits can be withdrawn whenever the person wants. It also allows
payments to be made through cheque.
iii. Through cheques, the money gets directly transferred between banks. So, no
direct payment of cash needs to be made.
iv. Banks extend loans from the deposits they receive so they mediate between
people having surplus funds and people in need of more funds through these
deposits.
v. Since bank deposits are also white money, the nation’s economy is more
transparent.
18. What is a cheque?
Ans. A cheque is a paper instructing the bank to pay a specific amount from a person’s
account to the person in whose name the cheque has been issued.
19. How do the deposits with the banks become their source of income?
Or,
‘Business is all about solving people’s problems – at a profit.’
Explain how banks function like a business with respect to the above
statement.
Ans.
 People have extra cash with them. Those having extra cash open a bank account
in their name and deposit the surplus money there.
 Out of the total money deposited with the banks, 15% of it is kept as a minimum
cash balance to pay to the depositors who might come to withdraw money from
the bank on any given day.
 Banks use a major portion of deposits to extend loans.
 They charge a higher rate of interest on loans than what they offer on deposits.
  The difference between what is charged from borrowers and what is paid to the
depositors is the main source of income for the banks.
20. Why is credit a crucial element in economic development?
Or,
Why cheap and affordable credit is important for a country?
Ans. Credit is a crucial element in the economic development of a country because:
i. It helps to meet the ongoing expenses of production.
ii. It helps in increasing earnings and encourages people to invest in agriculture,
engage in business, and set up small industries.
iii. It helps in completing production on time.
iv. Cheap credit will end the vicious cycle of a debt trap.
v. Cheap and easy credit would inspire better investment in technology and would
increase competition.
21. Explain the meaning of the Debt Trap by giving an example.
Ans. A debt trap is a situation where an individual or organization becomes trapped in a
cycle of debt that they are unable to escape from. This typically occurs when the
borrower takes out a loan or credit but struggles to make the required payments due to
high-interest rates, fees, or other financial obligations. As a result, they are forced to
take on additional debt to meet their existing obligations, which can lead to a spiral of
increasing debt and financial distress.
For example, a small farmer Swapna took a loan for crop cultivation but due to some
reason, she faced a situation of crop failure. So she took another loan for spraying
pesticides but the production was not enough to repay the loan. So, she was caught in a
debt trap.

22. What do you mean by the term ‘collateral’? Why do banks ask for collateral
while giving loans?
Ans. Collateral is an asset that the borrower owns (such as land, building, vehicle,
livestock, deposits with banks, etc.) and uses this as a guarantee to a lender until the
loan is repaid.
Banks use collateral as a guarantee until the loan is repaid. If the borrower fails to repay
the loan, the lender has the right to sell the asset or collateral to obtain payment.

23. What are the main terms of credit?

Ans. The main terms of credit are:
 Interest rate
 Collateral
 Documentation requirement
 Mode of repayment
 24. ‘A bank is a place that will lend you money if you can prove that you do not
need it.’ Justify the above statement in relation to the banks’ requirements
to ensure the security of the funds they lend.
Ans.
 Every loan agreement specifies an interest rate that the borrower must pay to the
lender along with the principal amount.
 In addition, lenders may demand collateral against loans to ensure the security of
the money they lend.
 Collateral is an asset that the borrower owns and uses as a guarantee to a lender
until the loan is repaid.
 If the borrower fails to repay the loan, the lender has the right to sell the asset or
collateral to obtain payment.
 Interest rate, collateral, documentation requirement, time period, and mode of
repayment together comprise the terms of credit which can vary from loan to
loan.
25. Amrita is a government employee and belongs to a rich urban household
whereas Rani works as a helper on a construction site and comes from a
poor rural household. Both have a crisis at home and wish to take loans.
Create a list of arguments explaining who between the two would
successfully be able to get the loan from a formal source. Why?
Ans. Amrita would successfully get the loan from a formal source because –
i. Can do the documentation required
ii. Can fulfill the terms of credit
iii. Bank can be assured of repayment of the loan by her through EMIs from her
salary.
26. Explain the significance of The Reserve Bank of India in the Indian economy.
Ans. Significance of RBI in the Indian economy:
i. In India, the Reserve Bank of India issues currency notes on behalf of the Central
Government.
ii. It supervises the functioning of formal sources of loans.
iii. The banks maintain a minimum cash balance out of the deposits they receive.
iv. The RBI monitors that the banks actually maintain the cash balance.
v. The 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, etc.
vi. Periodically, banks have to submit information to the RBI on how much they are
lending, to whom, at what interest rate, etc.
27. In what ways RBI supervises the functioning of banks?
Ans. The working of the banks and cooperatives are supervised by the RBI in the
following manner:
i. The RBI monitors that the banks actually maintain the cash balance.
 ii. The RBI makes sure that the banks give loans not just to profit-making businesses
and traders but also to small cultivators, small-scale industries, and other small
borrowers.
iii. Periodically, banks have to submit information to the RBI on how much they are
lending, to whom they are lending, at what interest rate, etc.
28. Compare and Contrast the conditions for taking loans from formal and
informal sources. Suggest an alternative source that you think is best for the
rural poor.
Ans.
Formal Sources of Credit Informal Sources of Credit
i. Credit is provided by moneylenders,
i. Credit is provided by banks and cooperatives.
friends, relatives, etc.
ii. Rate of interest is low. ii. Rate of interest is high.
iii. No unfair means adopted to take back the money if
iii. Unfair measures are adopted.
no re-payment is done.
iv. Supervised by RBI. iv. Not supervised
v. Have to adhere to terms of credit i.e., collateral, rate v. Other conditions like cultivating land
of interest, mode of payment, and documents during harvest time, etc.
 Self-help groups are an alternative source.
29. “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:
i. There is no organization to supervise the credit activities of lenders in the
informal sector.
ii. The informal sector lends at a very high rate of interest and uses unfair means to
get the money back.
iii. The 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.
iv. Sometimes, due to a higher rate of interest, the amount to be repaid becomes
higher than the income of the borrower due to that there is always a risk for
borrowers to fall into a debt trap.
30. Why do most rural households still remain dependent on informal sources
of credit?
Ans. Most rural households are still dependent on informal sources of credit because:
i. Limited availability of Banks in rural areas.
ii. People in rural areas face problems with regard to documentation.
 iii. The absence of collateral is one of the major reasons which prevents the poor
from getting bank loans.
iv. Rural people get easy loans from richer households through informal ways.
v. Poor people can approach the moneylenders even without repaying their earlier
loans.31.
31. Why do we need to expand formal sources of credit in India? Explain.
Or,
Why are formal sources of credit preferred over informal sources of credit?
Give three reasons.
Or,
Why is it necessary that banks and co-operatives increase their lending in
rural areas? Explain.
Ans. Formal sources of credit need to be expanded in India because:
i. To save people from the exploitation of the informal sector
ii. To save and reduce the dependence on informal sources of credit
iii. Formal sources charge a low rate of interest on loans.
iv. Higher Income through cheap borrowing
v. To save from debt trap and exploitation.
vi. It provides cheap and affordable credit. Cheap and affordable credit is crucial for
the country’s development
vii. RBI also supervises the formal sector credit through various rules and regulations
which ensures that banks give loans to small cultivators, small borrowers, etc.,
and not just to profit-making businesses and traders.
viii. It is important that formal credit is distributed more equally so that the poor can
benefit from cheaper loans.
32. Imagine yourself to be XYZ, a member of a women Self- Help Group.
Analyze the ways through which your group provides loans to the members.
Ans.
 Self Help Groups pool their savings.
 A typical SHG has 15-20 members, usually belonging to one neighborhood, who
meet and save regularly.
 Saving per member varies from Rs. 25 to Rs. 100 or more, depending on the
ability of the people to save.
 Members can take small loans from the group itself to meet their needs.
 The group charges interest on these loans but this is still less than what the
moneylender charges.
 After a year or two, if the group is regular in savings, it becomes eligible for
availing loan from the bank.
33. Explain the role of Self-Help Groups (SHGs) in rural society.
Ans. The role of Self-Help Groups (SHGs) in rural society are:
 i. Members of SHGs can take small loans from the group itself to meet their needs.
ii. The group charges less rate of interest on these loans.
iii. After a year or two, it becomes eligible for availing loan from the bank.
iv. The group is responsible for the repayment of the loan.
v. Any case of non-repayment of a loan by any one member is followed up seriously
by other members of the group.
vi. The SHGs help borrowers overcome the problem of lack of collateral.
vii. They can get timely loans for a variety of purposes and at a reasonable interest
rate.
viii. SHGs help women to become financially self-reliant.
ix. 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.
34. How do Self Help Groups help borrowers to overcome the problem of lack
of collateral? Explain.
Ans.
 People can get timely loans for a variety of purposes and at a reasonable interest
rate.
 SHGs are regular in their savings which can be used as monetary help.
 Members can take small loans without collateral to meet their needs.
 Any case of non-repayment of a loan by any one member is followed up seriously
by other members of the group.
 Because of this feature, banks are willing to lend to poor women when organized
in SHGs, even though they have no collateral as such.
 Due to timely repayment, banks also lend loans to SHGs.