CBSE Class 10 economics chapter 3 Money and Credit Questions and Answers

Chapter 3 Money and Credit Questions and Answers

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Exercises question and answers

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

Ans: The situations with high risks, credit might create further problems for the borrower:

  • Credit involves borrowing a certain amount of loan that is taken by a borrower from a lender at a high-interest rate. In case there is a failure, the borrower faces loss, then they further fall into the trap of credit. This is known as a debt trap.
  • Sometimes, the lender can sell the security or the assets as collateral pledged with the banks or cooperative society, or any informal agency of credit.
  • If a farmer takes a loan for crop production and it fails to produce crops, then the loan payment becomes impossible. To repay the loan, the farmer will have to sell a part of his land making the situation quite worse than before.

2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.

Ans: when a person desires to sell exactly what the other wants to buy, such a case is known as a Double Coincidence of want.

Double coincidence of want is an essential feature in a barter system where goods are directly exchanged without the use of money. In the economy money serves as a medium of exchange, it also removes the need for a double coincidence of want and barter system.  When a person has money can easily exchange it for any commodity or service he might want.

For example – there is no longer necessary for the shoemaker to look for the farmer who will buy his shoes and at the same time he will sell his rice to him. All he has to do to find a buyer for his shoes. Once he has exchanged his shoes for money. Now he can purchase rice or any commodity from the market.

3. How do banks mediate between those who have surplus money and those who need money?

Ans: Banks keep a small portion of deposits informed of cash (15%) for themselves, to pay the depositors on demand. Banks use the major portion of these deposits to give loans to those people who need money. In this way, banks mediate between those who have surplus money and those who need money.

4. Look at a 10 rupee note. What is written on top? Can you explain this statement?

Ans: “Reserve Bank of India” and “Guaranteed by the Central Government” is written on the top of a 10 rupee note. Currency in India is issued by the central bank of the country, in the case of India, the Reserve Bank of India is the central bank of the country. This currency is issued on behalf of the central Government and these two are the only authorities which are responsible for issuing notes and currency in India.

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

  • We need to expand formal sources of credit in India for the reasons mentioned below:
  • To reduce dependence on informal sources of credit because the latter charge high-interest rates and do not benefit the borrower much.
  • Cheap and affordable credit is essential for a country’s development.
  • Most loans from informal lenders carry a very high-interest rate and do little to increase the income of the borrowers. Thus, banks and cooperatives must increase their lending, particularly in rural areas, so that the dependence on informal sources of credit reduces.

6. What is the basic idea behind the SHGs for the poor? Explain in your own words.

Ans: The basic objective behind the SHGs is to provide financial resources to the poor people by organizing 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. They even provide loans at a reasonable rate of interest without collateral.

The main objectives of the SHGs are:

  • Organize rural poor people particularly women into small Self-Help Groups.
  • To collect the savings of their members.
  • To provide loans without collateral.
  • To provide timely loans for various purposes.
  • To provide loans at responsible interest rates and easy terms.

7. What are the reasons why the banks might not be willing to lend to certain borrowers?

Ans: The banks might not be willing to lend to certain borrowers due to the following reasons:

  1. Banks require proper documents and collateral as security against loans. Some persons fail to meet these requirements.
  2. The borrowers who have not repaid previous loans, the banks might not be willing to lend them further.
  3. The banks might not be willing to lend to those entrepreneurs who are going to invest in a business with high risks.
  4. One of the principal objectives of a bank is to earn more profits after meeting several expenses. For this purpose, it has to adopt judicious loan and investment policies which ensure fair and stable returns on the funds.

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

Ans: The Reserve Bank of India supervises the functioning of formal sources of loans. For instance, we have seen that banks maintain a minimum cash balance out of the deposits they receive. The RBI monitors that the banks maintain the cash balance. Similarly, the RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small-scale industries and small borrowers etc.

The supervision of RBI is necessary for the following reasons:

  1. It ensures the safety of the bank deposits of people.
  2. It helps in the collection of economic data all over the country.
  3. It contains corrupt practices creeping within banks.
  4. Information forwarded by banks to RBI helps the Ministry of Finance in drafting and presentation of the National Budget every year.

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9. Analyse the role of credit for development.

Ans: Credit is one of the major aspects of the development of a country. Affordable credit plays a very important role in the country’s development. People need loans for different reasons, and to meet this requirement, credit is very important. In India, a major part of the population is engaged in agricultural activities; credit plays a very crucial role in agricultural activities. People can borrow money and use modern farming methods to grow crops which are more reliable than the traditional methods of growing crops. Apart from this, there are small-scale industries, businesses and various other sectors where credit can help people and ultimately result in the development of the country.

10. Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss.

Ans: Manav wants to set up a small business. He needs to keep the below-mentioned things in mind while deciding whether to borrow money from a bank or money lender:

  1. He needs to compare the interest rate charged by both the bank and the moneylender. Whoever charges less should be his option.
  2. He needs to analyse whether he has all the eligible documents required by the banks to get his loan approved.
  3. How he wishes to repay the lender.
  4. Depending on these factors, Manav has to decide whether he has to borrow from the bank or the moneylender.

11. In India, about 80 percent of farmers are small farmers, who need credit for cultivation.

(a) Why might banks be unwilling to lend to small farmers?

Ans: Banks might be unwilling to lend money to small farmers because there are high risks. Small farmers have no collateral against loans. Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid. Also, proper documentation is required to get a loan from the bank, which might not be available to small-scale farmers. That is why banks have no interest to lend to small farmers.

(b) What are the other sources from which the small farmers can borrow?

Ans: Small farmers can move to informal sources of credit if they are not borrowing money from a bank. These informal sources of credit include moneylenders, agricultural traders, etc.

(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.

Ans: When a small-scale farmer borrows money from a bank, they have to repay the amount at a fixed rate of interest. For example, if a farmer borrows money from the bank and, during the harvest season, their crops are ruined, then they shall not be able to repay the amount loaned to them by the bank and will further fall into the debt trap.

(d) Suggest some ways by which small farmers can get cheap credit.

Ans: Besides banks, the other major source of cheap credit in rural areas is cooperative societies or cooperatives. Members of a cooperative society, pool their resources for cooperation in certain areas.

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12. Fill in the blanks:

 (i) Majority of the credit needs of poor households are met from informal sources.

(ii) High costs of borrowing increase the debt burden.

(iii) Reserve Bank of India issues currency notes on behalf of the Central Government.

(iv) Banks charge a higher interest rate on loans than what they offer on deposits.

(v) Collateral is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.

13. Choose the most appropriate answer.

(i) In a SHG most of the decisions regarding savings and loan activities are taken by

(a) Bank.

(b) Members.

(c) Non-government organisation.

Ans: b. Members

(ii) Formal sources of credit do not include

(a) Banks.

(b) Cooperatives.

(c) Employers

Ans: c) Employers

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ADDITIONAL PROJECT / ACTIVITY

The following table shows people in a variety of occupations in urban areas. What are the purposes for which the following people might need loans? Fill in the column.

OccupationsReason for Needing a Loan
Construction worker  To meet household/emergency expenses
A graduate student who is computer literateTo pursue higher education  
A person employed in government serviceTo buy a house / for an offspring’s wedding
Migrant labourer in DelhiTo buy house
Household maidTo meet living/emergency expenses
Small trader  To expand his trade / to buy new machinery
Autorickshaw driverTo buy a new autorickshaw
A worker whose factory has closed downTo meet living expenditures while still unemployed

Next, classify the people into two groups based on whom you think might get a bank loan and those who might not. What is the criterion that you have used for classification?

Ans

Those who might get a bank loanThose who might not get a bank loan
Graduate studentConstruction worker
A person employed in government serviceMigrant labourer in Delhi
Small traderHousehold maid
Autorickshaw driverA worker whose factory has closed down

The criterion I have used for the aforementioned classification is firstly, whether the borrower has the potential to repay the loan or not. Those with job security will certainly get a loan because they can give repayment instalments. The second basis of classification is whether the borrower has collateral or not, on which to guarantee his/her loan. These two are the basic prerequisites for getting a loan from a bank.

Additional question and answer

Multiple choice answer question

1. Money is used as a _________ of exchange.

  1. Medium
  2. Charge
  3. Sector
  4. All of them

Ans: a) Medium

2. What is a double coincidence of wants?

  1. When one party agrees and another party does not agree for exchanging commodities
  2. When both parties agree to sell and buy each other commodities
  3. Both (a) and (b)
  4. None of them

Ans: b) when both parties agree to sell and buy each other commodities

3. What are modern forms of currency?

  1. Paper notes and coins
  2. Paper notes and metal
  3. Coins and food grains
  4. Metal and food grains

Ans: a) Paper notes and Coins

4. Who authorized the currency?

  1. Government of Foreign
  2. State Bank of India
  3. Reserve Bank of India
  4. Government of the country

Ans: d) Government of the country

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5. In India, the ______________issues currency notes on behalf of the central government.

  1. Government of Foreign
  2. State Bank of India
  3. Reserve Bank of India
  4. Government of the country

Ans: c) Reserve Bank of India

6. Where did people hold money as a deposit?

  1. Safehouse
  2. Piggy bank
  3. Bank
  4. All of them

Ans: c) Bank

7. How much did the bank hold of their deposits of cash?

  1. 12%
  2. 10%
  3. 20%
  4. 15%

Ans: d) 15%

8. Banks use the _______ portion of the deposits to _____________.

  1. Major, extend loans
  2. Minor, bank
  3. Cash pay
  4. Loan use

Ans: a) Major, extend loans

9. What did banks do with deposits?

  1. Use in providing loans
  2. Use to pay the debt

Ans: a) Use in providing loans

10. Credit plays a _________ and ________ role in people life.

  1. Important, negative
  2. Vital, positive
  3. Positive, important

Ans: b) Vital, positive

11. In rural areas, the main demand for credit is for ___________.

  1. crop production
  2. shoe manufacturer
  3. housemaid

Ans: a) crop production

12. Who monitors the bank’s cash balance?

  1. State Bank of India
  2. United Bank of India
  3. Reserve Bank of India
  4. Central Bank of India

Ans: c) Reserve Bank of India

13. Who supervises the function of the formal source of loans?

  1. State Bank of India
  2. United Bank of India
  3. Reserve Bank of India
  4. Central Bank of India

Ans: c) Reserve Bank of India

14._______and_________ credit is crucial for the country’s development.

  1. Cheap, affordable
  2. High rate, more
  3. Cheap, high rate
  4. None

Ans: a) Cheap, affordable

15. ________ per cent of loans taken by poor households in the urban areas.

  1. 85%
  2. 75%
  3. 35%
  4. 50%

Ans: a) 85%

16. Who takes 85% of loans?

  1. Rich households
  2. Poor households
  3. Government worker

Ans: b) poor households

17. Urban households are taking _________ per cent of loans from informal sources and _____ per cent from formal sources.

  1. 90 %, 10%
  2. 30 %, 70%
  3. 50%, 50%
  4. 10%, 90%

Ans: d) 10%, 90%

18. What did the bank want for providing a loan?

  1. Proper documents and collateral
  2. Only property
  3. Not require document

Ans: a) Proper documents and collateral

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19. What is the full form of shgs?

  1. Saving Home Groups
  2. Safe Help Groups
  3. Same Home Groups
  4. Self Help Groups

Ans: d) Self-Help Groups

20. How many members are in shgs?

  1. 15-20
  2. 20-25
  3. 15-25
  4. 15-30

Ans: a) 15-20

21. What is a new way of providing loans in rural areas?

  1. Traders
  2. SHGs
  3. Cooperative societies

Ans: b) SHGs

22. Bank provides a higher rate of interest on ___________.

  1. Loans
  2. Saving account
  3. Fixed deposits
  4. Current account

Ans: c) Fixed deposits

23. What is the main source of income of the bank?

  1. Interest on a loan
  2. Interest on deposits

Ans: a) interest on a loan

24. In the barter system

  1. Goods are exchanged for money
  2. Goods are exchanged for foreign currency
  3. Goods are exchanged with goods only

Ans: c) Goods are exchanged with goods only

25. Which one is a feature of money?

  1. Medium of exchange
  2. Store of value
  3. Charge of loans

Ans: a) Medium of exchange

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Short answer type question

1. What is a medium of exchange?

Ans: Money acts as an intermediate in the exchange process, it is called a medium of exchange.

2. Why is money used for transactions?

Ans: A person holding money can easily exchange it for any commodity or service that he or she might want.

3. What is a double coincidence of wants?

Ans: when both parties have to agree to sell and buy each other’s commodities. This is known as a double coincidence of wants.

4. What is a barter system?

Ans: when a person desires to sell is exactly what the other wishes to buy. This system is known as the barter system.

5. What is a currency?

Ans: currency is a modern physical form of paper notes and coins.

6. Who did issued currency notes?

Ans: In India, the Reserve Bank of India issues currency notes on behalf of the central government. As per Indian law, no other individual or organization is allowed to issue currency.

7. What are the features of rupees?

Ans: The rupee is widely accepted as a medium of exchange. The law legalizes that no individual or organization in India can legally refuse a payment made in rupees.

8. What do you mean by deposits?

Ans: When we save some amount of money in the form of a deposit in a bank by opening a bank account, is called a deposit.

9. What is interest?

Ans: It means you can earn more from the money that you have deposited in the bank. The bank gives you some extra money on that deposit.

10. Why do we need to deposit our money in the bank?

 Ans: we need to deposit our money in the bank because money can be theft, loss and damaged from the house. And By depositing your money in a bank, it is protected from theft, loss, or damage.

11. 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 issued.

12. What do the banks do with the deposits?

Ans: There is an interesting mechanism working here. Banks use the major portion of the deposits to extend loans.

13. 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.

14. What is a Collateral?

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

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15. What are the sources of credit?

Ans: Various sources of obtaining credit

1. some people would borrow money from moneylenders at a certain interest rate.

2. some people would take bank loans at the interest rate.

3. some people take from the landowner at the interest rate.

4. the other major source of cheap credit from cooperative societies.

16. How can a loan divide?

Ans: The various types of loans can be divided into two types

  1. Formal sector loans
  2. Informal sector loans

17. What are formal sector loans?

Ans: The Reserve Bank of India supervises the functioning of formal sources of loans. The RBI monitors the banks in actually maintaining cash balances.

18. What are informal sector loans?

Ans: No organization supervises the credit activities of lenders in the informal sector. They can lend at whatever interest rate they choose.

19. What are Self Help Groups(SHGs)?

Ans: The idea is to organize the rural poor, in particular women, into small Self Help Groups (SHGs) and pool (collect) their savings. A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet and save regularly.

20. Which problems solve the SHGs?

Ans: SHGs help borrowers overcome the problem of lack of collateral. They can get timely loans for a variety of purposes and at a reasonable interest rate.

21. Write modern forms of money.

Ans: a modern form of money is paper notes, coins and demand deposits.

22. What is a debt trap?

Ans: A debt trap is a situation where lenders push the borrower into a very painful situation for recovering the principal and interest amount.

23. What is the cause of the debt trap?

Ans: in rural areas, food producers take loans for crops. When farming goes bad then they are caught in a debt trap. And also when they use credit for non-productive purposes.

24. Write sources of formal and informal loans in India.

Ans: Formal sources of the loan– cooperative societies, banks, commercial banks etc

Informal sources of the loan – local money lenders, land owners, relatives etc.

25. What are the advantages of money?

Ans: The advantage of money: –

  • Removes the double coincidences of wants
  • Removes the barter system
  • It is easy to carry

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Long answer type questions

1. Why the double coincidence of wants is an essential feature of the barter system?

Ans: when a person wants to sell shoes in the market and buy wheat. The shoe manufacturer will first exchange shoes that he has produced for money, and then exchange the money for wheat.

Imagine how much more difficult it would be if the shoe manufacturer had to directly exchange shoes for 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.

In that situation, both parties have to agree to sell and buy each other’s commodities. This is known as a double coincidence of wants.

The barter system is a method of exchanging goods and services without using money. In a barter system, people trade goods and services directly with each other, without using money. Double coincidence of wants is an essential feature of the barter system.

2. What are the features of currency?

Ans: The features of currency

  • Modern physical forms of money are paper notes and coins.
  • Modern currency is not made of precious metals like gold, silver, and copper.
  • A valid currency is only authorized by the government of the country.
  • In India, the Reserve Bank of India issues currency notes on behalf of the central government.
  • As per Indian law, no other individual or organization is allowed to issue currency.
  • The rupee is widely accepted as a medium of exchange.
  • The law legalizes that no individual or organization in India can legally refuse a payment made in rupees.

3. Why it is necessary to deposit money into banks?

Ans: people deposit money into banks:-

  • Interest – Banks provide interest on deposits. It means you can earn more from the money that you have deposited with the bank.
  • Safety and Security – By depositing your money in a bank, it is protected from theft, loss, or damage.
  • Other benefits – having a bank account with depositing money
  • Cheque – people can also make payments through cheques.

4. What are the features of currency?

Ans: The features of currency:-

  • 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.
  • The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash.
  • Since demand deposits are accepted widely as a means of payment, along with the currency.

5. How does the Reserve Bank manage the amount of deposits?

Ans: There is an interesting mechanism working here. Banks use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities. banks in India these days hold about 15 per cent of their deposits as cash. This is kept as a provision to pay the depositors who might come to withdraw money from the bank on any given day.

In this way, banks mediate between those who have surplus funds (the depositors) and those who require these funds (the borrowers). Banks charge a higher interest rate on loans than what they offer on deposits.

6. What is the advantage of formal sector loans?

Ans:  Advantage of formal sector loans:-

  • Banks use the major portion of the deposits to extend loans. Which help people to get loan easily.
  • There is a huge demand for loans for various economic activities which is managed by the Reserve Bank of India.
  • The banks in India these days hold about 15 per cent of their deposits as cash. This is kept as a provision to pay the depositors who might come to withdraw money from the bank on any given day.
  • banks mediate between those who have surplus funds (the depositors) and those who require these funds (the borrowers). Banks charge a higher interest rate on loans than what they offer on deposits.

7. What is the advantage of SHGs?

Ans: The advantages of SHGs –

  • SHGs help borrowers to overcome the problem of lack of collateral.
  • SHGs help to get timely loans for a variety of purposes with reasonable interest rates.
  • SHGs are building blocks of the organization of the rural poor.
  • SHGs help not only women to become financially self-reliant, provide a platform to discuss and act on social issues such as health, violence etc.

8. What is the limitation of the barter system?

Ans: The limitation of the barter system is:-

  • Lack of common measure of value:- in a barter system, the value of commodities is not equal and valuable to other commodities and services. There are no specific measure value units.
  • Lack of double coincidences of wants: barter system only applies when both parties agree to exchange their commodities with each other.

9. Why are deposits called demand deposits?

Ans: Banks accept the deposits and also pay interest on the deposits. people’s money is safe with the banks and it earns an amount as interest. People also have the provision to withdraw money as and when they require it.

Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

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10. Distinguish between formal sector loans and informal sector loans.

Formal sectors loanInformal sectors loan
Formal sector loans are taken either from the bank or the cooperatives.Informal sector loans are taken by money lenders, landowners, traders etc.
The formal sector loans department is managed by the Reserve Bank of India.In Informal sector loans, There is no one to stop them from using unfair means to get their money back. 
In formal sector loans, the interest rate is affordable.They can lend at whatever interest rate they choose.

11. How did self-help groups work?

Ans: SHGs work in rural poor. They mostly work for women. They make a small group of 15-20 members who belong to the same neighbourhood and meet and save daily.

  • 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.
  • The loan is issued in the name of the group and also creates opportunities for self-employment.
  • Most of the decisions regarding saving and loan activities are taken by the group members.
  • The group members decide the rate of interest, repayment schedule, amount etc.

12. What is the characteristic of cheque payments?

Ans: The characteristics of cheque payments:

  • For payment through cheque, the payer who has an account with the bank, makes out a cheque for a specific amount.
  • 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.
  • The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash.
  • Since cheque payments are accepted widely as a means of payment, along with currency, they constitute money in the modern economy

13. Why is money accepted as a medium of exchange in India?

Ans: Money is accepted as a medium of exchange because:

  • The currency is authorised by the government of the country.
  • The Reserve Bank of India issues currency notes on behalf of the Central Government. As per Indian law, no other individual or organisation is allowed to issue currency.
  • Moreover the law legalises the use of rupees as a medium of payment that cannot be refused in setting transactions in India.

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