Chapter 3 Money and Credit Important Questions Class 10 Economics

Chapter 3 Money and Credit Important Questions Class 10 Economics helps us to remember the concepts more effectively. It teaches us how to answer questions in the exam.

Chapter 3 Class 10 Economics Extra Questions will also help you to be better prepared for the exam. Doing extra practise can give you an edge over other candidates.

Chapter 3 Money and Credit Important Questions and Answers Class 10 Economics

Chapter 3 Money and Credit Very Short Answer Questions (1 Mark)

1. How is money beneficial in transactions?

Solution

It eliminates the need for double coincidence of wants and acts as a medium of exchange.

2. What is the meaning of ‘barter system’?

Solution

The exchange of goods, property, services, etc. for other goods, etc. without using money is known as ‘barter system’.

3. Why one cannot refuse a payment made in rupees in India?

Solution

It is accepted as a medium of exchange and it is authorized by the government of the country.

4. What does modern form of money include?

Solution

Modern form of money includes currency-that is paper notes and coins.

5. What is a ‘cheque’?

Solution

A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person on whose name the cheque has been issued.

6. In India, who is authorised to issue notes and currency?

Solution

In India, ‘Reserve Bank of India’ issues currency notes on behalf of the central government.

7. What are ‘demand deposits’?

Solution

People deposit their money in the bank as it earns interest. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

8. What is the major source of revenue for the commercial banks?

Solution

Their major source of revenue is the difference between what is charged from borrowers and what is paid to depositors.

9. What is a ‘debt trap’?

Solution

Credit in some cases pushes the borrower into a situation from which recovery is very painful.

10. What are SHGs?

Solution

They are Self Help Groups, who provide mutual support to each other.

11. How do banks act as a mediator?

Solution

Banks mediate between those who have surplus funds (depositors) and those who are in need of these funds (the borrowers).

12. What are the formal sectors of loan?

Solution

Formal sectors of loan include all the banks and cooperatives.

13. What is necessary to reduce the dependence on informal sources of credit in rural areas?

Solution

It is necessary that banks and cooperatives increase their lending in the rural areas.

14. How does money eliminate the need for double coincidence of wants?

Solution

If you have money in your pocket, you can purchase any thing at any time as you wish.

15. What do you mean by the term ‘collateral’?

Solution

It is an asset that the borrower owns and uses this guarantee to a lender until the loan is repaid.

16. Which segment of the society receives formal credit?

Solution

It is the richer segment of society which receives formal credit.

17. What is a ‘debt trap’?

Solution

Credit in some cases pushes the borrower into a situation from which recovery is very painful.

18. What are the main ‘terms of credit’?

Solution

Interest rate, collateral and documentation requirement and the mode of repayment together comprise what is called ‘terms of credit’.

Chapter 3 Money and Credit Short Answer Questions (3 Marks)

1. Double coincidence of wants is an essential feature of barter system. How?

Solution

(i) Barter system is only possible if there is double coincidence of wants. It means that both parties have to agree to sell and buy each other’s commodities.
(ii) In other words, what a person desires to sell is exactly what the other wishes to buy.
(iii) In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. For example, a shoe manufacturer wants to sell shoes in the market and buy 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 shoes in exchange.

2. How is modern form of currency accepted as a medium of exchange?

Solution

(i) Modern forms of money include currency-paper notes and coins. Modern currency is not made of precious metals such as gold, silver and copper. The modern currency is without any use of its own. In India, Reserve Bank of India issues currency notes on behalf of the Central government.
(ii) As per the Indian law, no other individual or organisation is allowed to issue currency. No individual in India can legally refuse a payment made in rupees.

3. What are ‘demand deposits’?

Solution

(i) Workers who receive their salaries at the end of each month have extra cash at the beginning of the month. This extra cash is deposited with the bank by opening a bank account in their name. 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 as well.
(ii) People also have the provision to withdraw the money as and when they require. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

4. Why is the rupee widely accepted as a medium of exchange?

Solution

(i) In India, the Reserve Bank of India issues currency notes on behalf of the central government.
(ii) As per Indian law, no other individual or organisation is allowed to issue currency.
(iii) Moreover, the law legalises the use of rupee as a medium of payment that cannot be refused in settling transaction in India.
(iv) No individual in India can legally refuse a payment made in rupees. Hence, the rupee is widely accepted as a medium of exchange.

5. Why the rupee is widely accepted as a medium of exchange?

Solution

(i) The currency is authorized 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 organization is allowed to issue currency.
(iv) The law legalizes the use of rupee as a medium of payment that cannot be refused in settling transactions in India.

6. What do the banks do with the deposits which they accept from the public?

Solution

(i) Banks keep only a small proportion of their deposits as cash with themselves.
(ii) For example, banks in India hold about 15 percent of their deposits as cash to pay the depositors who might come to withdraw money from the bank.
(iii) Banks use the remaining portion of the deposits to extend loans for various economic activities.
(iv) In this way, banks mediate between those who have surplus funds (the depositors) and those who need the funds (the borrowers).

7. In situations with high risks, credit might create further problems for the borrower. Explain.

Solution

(i) In situation with high risks, credit might create further problems and pushes the person into a debt trap.
(ii) He is much worse off than before.
(iii) Credit pushes the borrower into a situation from which recovery is very painful. For example, Crop production involves high costs on inputs such as HYV seeds, fertilizers, pesticides, water etc. Farmers generally take loans at the beginning of the season and repay the loan after harvest. But the failure of the crop makes loan repayment impossible. They have to sell part of the land to repay the loan or a fresh loan may be required to repay the previous loan, and the borrower may find himself caught in a vicious circle.

8. In what ways does the RBI supervise the functioning of the banks? Why is this necessary?

Solution

(i) The RBI supervises the functioning of formal sources of loans.
(ii) With the RBI, the banks maintain a minimum cash balance out of the deposits they receive. The RBI monitors that the banks actually maintain the cash balance.
(iii) The RBI sees 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.
(ib) Banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate etc.

9. How are people involved with the banks?

Solution

(i) Banks help people to save their money and keep their money in safe custody of the bank. Banks accept deposits from the public and also help people to earn interest on their deposits.
(ii) People can withdraw the money deposited with the bank at the time of their need. As the money can be withdrawn on demand, these are called demand deposits.
(iii) Banks also grant loans to people for a variety of purposes. In times of need individuals, business houses and industries can borrow money from the banks.

10. Self-help Groups support has brought about a revolutionary change in the rural sector.

Solution

(i) The idea is to organize rural poor, in particular women, into small Self Help Groups (SHGs) and pool their savings. 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.
(ii) If the group is regular in savings, it becomes eligible for availing loan from the bank. Loan is sanctioned in the name of the group and is meant to create self-employment opportunities for the members. The SHG is responsible for repayment of the loan, hence, banks get ready to give loans without collateral.
(iii) Self-help, self-reliance and creating a support system and platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence etc.

11. Mention three limitations of the barter system.

Solution

(i) Lack of double coincidence of wants. It means, both the parties have to agree to sell and buy each others’ commodities.
(ii) Valuations of all the goods cannot be done easily.
(iii) There are certain products which cannot be divided.

12. “Most of the poor households still depend on the informal sector for loans, both in rural and urban areas of India”. Support the statement with three examples.

Solution

(i) Banks are not present everywhere in rural India. Even when they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources.
(ii) Bank loans require proper document and collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.
(iii) Informal lenders such as moneylenders, on the other hand, know the borrowers personally and hence are often willing to give a loan without collateral. The borrowers can, if necessary, approach the moneylenders even without repaying their earlier loans.

Chapter 3 Money and Credit Long Answer Questions (5 Marks)

1. How do banks play an important role in the economy of India? Explain.

Solution

(i) Banks play an important role in developing the economy of India in the following ways:
(ii) Banks accept money of the people and keep it in safe custody to be used by the depositors in future.
(iii) Banks also increase the savings of the depositors by paying interest on the money deposited.
(iv) Banks mediate between people who have surplus and those who need money. This is done through granting loans. People avail themselves of these loan facilities to increase production and income.
(v) Banks, being the formal source of credit, give loans at a very low rate of interest at flexible terms and conditions.
(vi) Special provisions are made through banks for the upliftment of agriculture and industry like waiving of loans of the farmers.

2. What is credit? How does credit play a vital and positive role? Explain with an example.

Solution

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 in the following ways:

(i) It helps people from all walks of life in setting up their business, increase their income and provide support to their family needs. Credit helps to increase earnings and therefore the person is better off than before.
(ii) In rural areas credit helps in the development of agriculture by providing funds to farmers to buy seeds, fertilizers, expensive pesticides.
(iii) Manufacturers need credit for buying raw material or to meet ongoing expenditure of production.
(iv) Credit helps in the purchase of plant, machinery, equipment, etc.
(v) People often avail themselves of credit to purchase luxury items which further raises their standard of living.
(vi) It enables us to invest in human resource. People take credit for education, training, etc. which allows enrichment of human resource.
(vii) For example, Mohan 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, increase his income.

3. Explain the role of cooperatives in providing credit/loans.

Solution

(i) Besides banks, the other major source of cheap credit in rural areas are the cooperative societies (or cooperatives).
(ii) Members of a cooperative pool their resources for cooperation in certain areas.
(iii) It accepts deposits from its members.
(iv) With these deposits as collateral, the Cooperative has obtained a large loan from the bank.
(v) These funds are used to provide loans to members.
(vi) Once these loans are repaid, another round of lending can take place.
(vii) They provide 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.

4. “Poor households still depend on informal sources of credit.” Support the statement with examples.

Solution

(i) Banks are not present everywhere in rural India.
(ii) Even if they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources.
(iii) Bank loans require proper documents and a collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.
(iv) Informal lenders like moneylenders know the borrower personally and hence, are often willing to give a loan without a collateral.
(v) The borrowers can, if necessary, approach the moneylender even without repaying their earlier loans. However, the moneylenders charge very high rates of interest, keep no records of the transactions and harass the poor borrowers.

5. Why cheap and affordable credit is crucial for the country’s development?

Solution

(i) Compared to formal lenders, most of the informal lenders charge a much higher interest on loans.
(ii) The RBI supervises the functioning of formal sources of loan but not the informal sector.
(iii) 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.
(iv) 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.
(v) People who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing.
(vi) For these reasons, banks and cooperative societies need to lend more. This would lead to higher incomes and many people could then borrow cheaply for a variety of needs.
(vii) They could grow crops, do business, set up small-scale industries etc. They could set up new industries or trade in goods.

6. Discuss the role of Self-Help Groups in the provision of rural credit.

Solution

(i) A typical SHG has 15-20 members, usually belonging to one neighbourhood, 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.
(i) 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.
(i) After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank. Loan is sanctioned in the name of the group and is meant to create self-employment opportunities for the members.
(i) For instance, small loans are provided to the members for releasing mortgaged land, for meeting working capital needs (e.g. buying seeds, fertilisers, raw materials like bamboo and cloth), for housing materials, for acquiring assets like sewing machine, handlooms, cattle, etc.
(i) It is the group which is responsible for the repayment of the loan. Any case of nonrepayment of loan by any one member is followed up seriously by other members in the group. Because of this feature, banks are willing to lend to the poor women when organised in SHGs, even though they have no collateral as such.

7. What are the differences between formal and informal sources of credit?

Solution

Formal sources of credit	Informal sources of credit
They cover those sources of credit which are registered by the government and have to follow its rules and regulations.	They include these small and scattered units which are largely outside the control of the government. Though there are no rules and regulations.
These sources are banks and co-operatives.	They are moneylenders, traders, employers, landlords etc.
The RBI supervises the functioning of formal sources of credit.	There is no organization which supervises the credit activities of informal sector.
They have social welfare motive a part from profit making.	Their only motive is profit-making.
They generally charge lower rate of interest.	They charge much higher rate of interest on loans.
They do not impose any unfair condition.	They impose many tough conditions.