Money and Credit Important Questions Class 10 Social Science Economics
Very Short Answer Type Questions
Question 1. What is a ‘debt trap’?
Answer
Credit in some cases pushes the borrower into a situation from which recovery is very painful.
Question 2. What is ‘credit’? What is ‘collateral’?
Answer
‘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.
Question 3. Who issues currency in India?
Answer
The Reserve Bank of India issues currency in India.
Question 4. What is barter system?
Answer
When goods are directly exchanged for goods and there is no use of money, it is called barter system.
Question 5. What is Money Supply?
Answer
Money supply refers to total money in circulation in any country at a given point of time.
Question 6. What are informal sectors of loan?
Answer
Informal sectors include moneylenders, traders, employers, relatives and friends, etc.
Question 7. What do you mean by a bank?
Answer
A bank is an institution which deals with the transaction of money and credit.
Question 8. Why one cannot refuse a payment made in rupees in India?
Answer
One cannot refuse a payment made in rupees in India: Because it is accepted as a medium of exchange. The currency is authorized by the government of the country.
Question 9. What is a commercial bank?
Answer
A commercial bank is a financial institution which deals with money and credit with a view to earn profit.
Question 10. What are ‘demand deposits’?
Answer
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 Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.
Question 11. What is called the medium of exchange?
Answer
Money as an intermediate in the exchange process is rightly called the medium of exchange.
Question 12. How do banks act as a mediator?
Answer
Banks mediate between those who have surplus funds (depositors) and those who are in need of these funds (the borrowers).
Question 13. What are the main ‘terms of credit’?
Answer
Interest rate, collateral and documentation requirement and the mode of repayment together comprise what is called ‘terms of credit’.
Question 14. What report is submitted periodically by all the banks to RBI?
Answer
Periodically, banks have to submit information to the RBI on how much they are lending, to whom and at what rate.
Question 15. Why do banks and cooperatives need to lend more?
Answer
Banks and cooperative societies need to lend more. This would lead to higher incomes and many more could then borrow cheaply for a variety of needs. Cheap and affordable credit is crucial for the country’s development.
Question 16. What prevents the poor from getting bank loans?
Answer
Bank loans require proper documents and collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.
Question 17. How do the deposits with banks become their source of income?
Answer
The Source of income of bank: Banks charge higher interest rate on loans than what they offer on deposits. The difference of interest is the main source of income of banks.
Short Answer Type Questions
Question 1. Give briefly the functions of money.
Answer
Money, in the form of cash or cheques, is a medium of exchange. Its functions, briefly, are:
- it acts as a medium of exchange,
- it acts as a measure of value;
- it is source of store of value;
- it helps us transfer value;
- it acts as a standard for deferred payments.
Question 2. How are demand deposits accepted as a means of payment?
Answer
Demand deposits accepted as a means of payment because:
- Demand deposits offer another interesting facility. It helps in making the payment in cheque.
- A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the other person or to the account holder.
- Thus, we see that demand deposits share the essential features of money.
- The facility of cheques against demand deposits makes settlement of payments possible without using cash.
- Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.
Question 3. Why rupee is used, in India, as a medium of exchange?
Answer
As per law, it is only the Reserve Bank of India which issues paper notes. We find rupee as a paper note. No individual has been authorised to issue rupees in the form of paper currency Law recognises the use of rupees as a medium of making payment. It is used in settling transactions in India. No individual in India can legally refuse a payment made in rupees.
Question 4. Give an example to show that double coincidence of wants is necessary in a barter system.
Answer
A shoe manufacturer wants to sell shoes in the market and buy wheat. The shoe manufacturer will first exchange shoes that he had produced for money, and then exchange the money for wheat. Imagine how difficult it would be if the shoe manufacturer had to directly exchange shoes for wheat without using 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. That is, both parties have to agree to sell and buy each other’s commodities. This is known as double coincidence of wants.
Question 5. State three disadvantages of the barter system.
Answer
Advantages of the barter system:
- In a barter system, double coincidence of wants is required.
- Here, the person is required to sell only what the other wishes to buy.
- If both parties do not agree, the goods cannot be exchanged for goods.
Question 6. “Banks are efficient medium of exchange.” Support the statement with arguments.
Answer
Banks are efficient medium of exchange:
- Demand deposits share the essential features of money.
- The facility of cheque against demand deposit makes it possible to directly settle payment without the use of cash.
- Demand deposits are accepted widely as a means of payment.
Question 7. Why are terms of credit required for a loan or credit?
Answer
Terms of credit required for a loan or credit:
- Terms of credit are required so that the borrower knows the conditions to take the loan.
- The collateral, in the form of security or guarantee, is given to the lender until the loan is repaid.
- If the borrower fails to repay the loan, the lender has all the rights to sell the assets or collateral to obtain the payment.
Question 8. How is the concept of Self Help Groups important for poor people? Give your view point.
Answer
- Self Help Groups help in pooling the savings of the members, who are poor people.
- Members can get timely loans for a variety of purposes.
- They get loan at a reasonable rate of interest.
- It helps borrowers to overcome the problem of lack of collateral and documentation.
- It saves them from exploitation of the money lenders.
- This interest income becomes an extra source of income of the members.
Question 9. Explain any three loan activities of banks in India.
Answer
Loan activities of Banks in India:
- Banks use the major portion of the deposits to extend loans.
- Banks make use of the deposits to meet the loan requirements of the people.
- Banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).
- Banks charge a higher interest rate on loans than what it offers on deposits.
Question 10. How do farmers get into debt trap?
Answer
Farmers usually take crop loans at the beginning of the season and repay the loan after harvest. Sometimes, the failure of the crop makes loan repayment impossible. So, the farmers have to sell a part of their land to repay the loan. Credit in such a condition pushes the borrowers into a situation from which recovery is painful and they get into the debt trap.
Question 11. Explain the values which a borrower should observe for the proper use of loan taken.
Answer
Borrower should observe the following for the proper use of loan taken:
- Proper planning of both for borrowing and spending of loan amount.
- Use the loan for the purpose for which it has been borrowed.
- Follow the terms and conditions of the credit.
- To develop consciousness to repay the loan on time.
Question 12. Differentiate between demand deposits and fixed deposits
Answer
Demand deposits can be written down from the bank without any notice; fixed deposits are withdrawn only at the time of maturity. Demand deposits are chequable; fixed deposits are not chequable. Demand deposit constitute a part of money supply while the fixed deposits come under the category of near money.
Long Answer Type Questions
Question 1. “Deposits with the banks are beneficial to the depositers as well as to the nation”. Examine the statement.
Answer
Deposits with the banks are beneficial to the depositors as well as to the nation.
Benefits to the Depositors:
- Banks accepts the deposits and pay interest to the depositor.
- People’s money is safe with the banks.
- People can withdraw the money as and when they require.
Benefits to the Nation:
- Banks use money of the depositor to afford loans.
- There is a huge demand for loans for various economic activities.
- Banks mediate between those who have surplus funds and those who are in need of these funds. Thus it helps in the economic development of the nation.
Question 2. What does the bank do with the deposits it has?
Answer
Banks have deposits from the people. It keeps only a small proportion of its deposits as cash with itself. For example, 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 day. Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage this cash.
Banks use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities banks make use of the deposits to meet the loan requirement of the people. In this way, banks mediate between those who a surplus funds (the depositors) and those who are in need these funds (the borrowers). Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charge from borrowers and what is paid to depositors is their main source of income.
Question 3. What is credit? How can credit be both an asset as well as a debt trap?
Answer
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.
(i) Example of credit as an asset: During the festival season, a shoe manufacturer has received an order of making shoes in bulk, within a month’s time. To complete production, he hired some extra workers and has to purchase the raw materials. He asks the supplier to supply leather now and promises to pay him later. Then he took some advance payment from the trader. By the end of the month, he is able to deliver the order, make a good profit and repay the money he had borrowed.
(ii) Example of credit as debt trap: A farmer picks up the loan from a moneylender to meet the expenses of cultivation. But unfortunately the crop is hit by the pests and fails. So, he is unable to repay the loan and debt grows larger with interest. Next year, he picks up a fresh loan and is able to have a normal crop that year. But earnings are not enough to pay the earlier debt. So, he is caught in a debt trap. He can repay the loan, only after selling a part of the land.
In shoemaker’s case, credit plays a vital and positive role, whereas in farmer’s case credit pushes the borrower into a situation from which recovery is very painful.
Question 4. Write a note on ‘Self Help Group’.
Answer
In recent years, people have tried out some newer ways of providing loans to the poor. The idea is to organise 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. Saving per member varies from ₹ 25 to ₹ 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 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. Moreover, SHGs are the building blocks of organisation of the rural poor. Not only does it help women to become financially self-reliant, but the regular meetings of the group also provide a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.
Question 5. Write a note on the success story of ‘Grameen Bank of Bangladesh’.
Answer
Grameen Bank of Bangladesh was founded by Prof. Muhammad Yunus (a recipient of Nobel Peace Prize for the year 2006) in year 1970. Over the last 42 years i.e., from 1976 to 2017, the operations of the bank spread to a large area of Bangladesh. The bank was started with a very small project and in year 2005, it spread across 40,000 villages with 6 million borrowers in various parts of Bangladesh. Most of the borrowers of this bank are women and belong to poor sections of society. These poor women have started ‘self-employment’ projects by taking credit from this Grameen bank. This credit has positive impact on these women as they started a gainful employment, which helped them not only to repay their loan but also to earn a good living for themselves and their family.
Question 6. Review any three merits and any two demerits of ‘formal sector of credit’ in India.
Answer
Merits
- Helps to meet the working capital needs of production.
- Helps in ongoing expenses of production.
- Helps in completing production on time.
- Helps in increasing earnings.
- Low interest rates.
- Easy access of loans to small cultivators and small scale industries.
Demerits
- Difficulty in obtaining loans.
- Collateral issues.
- Documentation could be a problematic issue for few.
- Lack of credibility in rural areas.
Question 7. What are the differences between formal and informal sources of credit?
Answer
Formal sources:
- These sources of credit are registered by the government and have to follow its rules and regulations.
- RBI supervises the functioning of formal sources of credit.
- They generally charge lower rates of interest.
- Their main motive is social welfare.
Informal sources:
- These include those small and scattered units which are largely outside the control of the government.
- There is no organisation which supervises the credit activities.
- They charge much higher rates of interest.
- Their main motive is profit-making.
Question 8. “The rich households are availing cheap credit from formal lenders whereas the poor households have to pay a heavy price for borrowing.” Comment.
Answer
- The formal sector still meets only about half of the total credit needs of the rural people.
- The remaining credit needs are met from informal sources.
- Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers.
- Thus, it is necessary that banks and cooperatives increase their lending particularly in the rural areas, so that the dependence on informal sources of credit reduces.
- While formal sector loans need to expand, it is also necessary that everyone receives these loans.
At present, it is the rich households who receive formal credit whereas the poor have to depend on the informal sources.