Money and Credit Question 1. Give any two examples of informal sector of credit.
Answer : The two examples of informal sector of credit are moneylenders and friends.
Question 2. Highlight the inherent problem in double coincidence of wants.
Answer : The inherent problem in double coincidence of wants is both the parties (seller and the buyer) have to agree to buy and sell each other’s commodities.
Question 3. How does the use of money make it easier to exchange things? Give an example.
Answer : In barter system, if a shoe manufacturer wants to sell shoes and buy wheat, first he has to look for a wheat-growing farmer who wants to buy shoes and needs to sell wheat.
Money can make it easier to exchange the things. The shoe manufacturer can sell the shoes for money and then with that money he can bed to buy wheat.
Question 4. How is money beneficial in transactions?
Answer : Money is beneficial in transactions as we can directly settle the transaction with use of it.
Question 5. How do the deposits with the banks become their source of income?
Answer : With the deposits in the bank, the bank use it to extend loan to the borrowers with the high rate of interest. Bank pays less rate of interest to the depositors. The difference is the source of income of the banks.
Question 6. Why can one not refuse a payment made in rupees in India?
Answer : One cannot refuse a payment made in rupees in India because it is authorized by the government of the country.
Question 7. Compare formal sector loans with informal sector loans regarding interest only.
Answer : The rate of interest charged by the formal sector is low whereas it is high in case of the informal sector.
Question 8. Why is the supervision of the functioning of the formal sources of loans necessary?
Answer : The supervision of the functioning of the formal sources of loans necessary to protect the borrowers from any kind of harassment as done in the informal sector.
Question 9. Prove with an argument that there is a great need to expand formal sources of credit in rural India.
Answer : There is a great need to expand formal sources of credit in rural India so that the people can be protected from the clutch of the moneylenders and improve their economic condition.
Question 10. Why are most of the poor households deprived from the formal sector of loans?
Answer : As the banks are not available everywhere in the rural areas and also due to its documentation process, most of the poor households are deprived from the formal sector of loans.
Question 11. How does money eliminate the need for double coincidence of wants?
Answer : Money acts as an intermediate in the exchange process and thus eliminates the need for double coincidence of wants.
Question 12. What is the meaning of barter system?
Answer : In the earlier times, before the introduction o f money, goods and services were exchanged with goods and services. This system of exchange was termed as barter system.
Question 13. What is meant by double coincidence of wants?
Answer : An essential feature of barter system is double coincidence of wants in which, both the parties (seller and the buyer) have to agree to buy and sell each other’s commodities.
Question 14. How does money act as a medium of exchange?
Answer : Money acts as an intermediate in the exchange process and eliminates the need for double coincidence of wants. As money acts as intermediate, it is also called medium of exchange.
Question 15. What is a cheque?
Answer : A cheque is a paper that instructs the bank to pay a specific amount from the holder’s account to the person in whose name the cheque has been issued.
Question 16. Who supervises the functioning of the formal sources of loans?
Answer : The functioning of the formal sources of loans is supervised by the Reserve Bank of India.
Question 17. What are the two forms o f modern currency?
Answer : Paper notes and coins are the two forms of modern currency.
Question 18. What is collateral?
Answer : It is an asset that the borrower owns and given to the lender as a guarantee that he will repay the loan. If the borrower is unable to repay the loan then the lender has the right to sell it and get the money back.
Question 19. Define credit.
Answer : Credit is an agreement between the lender and the borrower in which the borrower promises to pay the lender in the future.
Question 20. Which are the two major sources of formal loan for rural households.
Answer : The two major sources of formal loan for rural households are Banks and Cooperatives.
3 Marks Questions
Question 21. Why is cheap and affordable credit important for the country’s development? Explain any three reasons.
Answer : Due to the following three reasons, cheap and affordable credit is important for the country’s development:
(a) It will help people to take credit for variety of reasons.
(b) It will help poor people to get rid of the problem of moneylenders and their high rate of interest.
(c) It will be easy for the people to repay the loan.
Question 22. “Banks are efficient medium of exchange.” Support the statement with arguments.
Answer : Yes, it is true to say that Banks are efficient medium of exchange. 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 minimum cash balance to pay to the depositors who might come to withdraw money from the bank on any given day. Rest of the amount is used to extend loan to the borrowers.
Question 23. Explain any three loan activities of banks in India.
Answer : The three loan activities of the banks are:
(a) People have extra cash with them. Those having extra cash open a bank account in their name and deposit the surplus money there.
(b) Out of the total money deposited with the banks, 15% of it is kept as minimum cash balance to pay to the depositors who might come to withdraw money from the bank on any given day.
(c) Rest of the amount is used to extend loan to the borrowers.
Question 24. Illustrate with examples the role of ‘loan’ in business.
Answer : The loan plays two different role in business:
(a) Credit plays a positive role when the borrower is able to return the loan amount on time and also made some profit with the use of that money. For example, Salim, a shoe manufacturer took a loan from different sources to complete the order of 3000 pair of shoes. In the end he delivered the order, made profit and repaid the loan.
(b) Sometimes credit is very painful as it pushes the borrower into such a situation from where recovery is very difficult. In this situation, the borrower is not able to repay the loan and many a times caught into the situation of debt-trap. For example, a small farmer Swapna took loan for crop cultivation but due to some reason she faced the 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 debt-trap.
Question 25. Describe the utility of Cheque.
Answer : A Cheque is a paper that instructs the bank to pay a specific amount from the account holder’s account to the person in whose name the Cheque has been issued. Demand deposits are accepted as a means of payment because the depositors get the facility of Cheque against it, which is used to settle the transaction without the use of money.
Question 26. How can money be easily exchanged for goods and services? Give an example to explain.
Answer : If a shoe manufacturer wants to sell shoes and buy wheat, then first he has to look for a wheat-growing farmer who wants to buy shoes and needs to sell wheat. Money can make it easier to exchange the things. The shoe manufacturer can sell the shoes for money and that money can used to buy wheat.
Question 27. “The credit activities of the informal sector should be discouraged.” Support the statement with arguments.
Answer : It is true to say that the credit activities of the informal sector should be discouraged. It is due to the following reasons:
(a) They charge high rate of interest in comparison to that of formal sector.
(b) Thus the cost of borrowing is high.
(c) Due to high cost of borrowing,the borrowers have to repay more and they will have less saving, which will hinder individual economic development and ultimately will affect the country’s economic development.
Question 28. “Cheap and affordable credit is crucial for the country’s development.” Assess the statement.
Answer : Due to the following three reasons, cheap and affordable credit is important for the country’s development:
(a) It will help people to take credit for variety of reasons.
(b) It will help poor people to get rid of the problem of moneylenders and their high rate of interest.
(c) It will be easy for the people to repay the loan.
Question 29. “Deposits with the banks are beneficial to the depositors as well as to the nation.” Examine the statement.
Answer : Those having extra cash open a bank account in their name and deposit the surplus money there. Their money is safe with the banks and they get some interest rate on the amount
they have deposited. Out of the total money deposited with the banks, 15% of it is kept as minimum cash balance to pay to the depositors who might come to withdraw money from the bank on any given day. Rest of the amount is used to extend loan to the borrowers. This helps other people to run and expand their business which will increase the individual income and finally the country’s income.
Question 30. ‘Credit has its own unique role for development.’ Justify the statement with arguments.
Answer : Credit plays a positive role when the borrower is able to return the loan amount on time and also made some profit with the use of that money. For example, Salim, a shoe manufacturer took a loan from different sources to complete the order of 3000 pair of shoes. In the end he delivered the order, made profit and repaid the loan. Sometimes, credit is very painful as it pushes the borrower into such a situation from where recovery is very difficult. In this situation the borrower is not able to repay the loan and many a times caught into the situation of debt-trap. For example, a small farmer Swapna took loan for crop cultivation but due to some reason she faced the 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 debt-trap.
Question 31. How is money transferred from one bank account to another bank account? Explain with an example.
Answer : In modern times we have different options to transfer the money from one bank account to another such as through Cheque, draft, internet banking etc. A Cheque is a paper that instructs the bank to pay a specific amount from the holder’s account to the person in whose name the cheque has been issued. In case of a Cheque, a person writes a Cheque in the name of the person in whose account the money is to be transferred. Then it is deposited by the person in his/ her bank. The bank transfers the amount to the person on whose name the cheque is drawn.
Question 32. “Poor households still depend on informal source of credit.” Support the statement with examples.
OR
“Most of the poor household still depend on the informal sector for loans, both in rural and urban areas of India.” Support the statement with three examples.
Answer : Yes, it is true that the poor households still depend on informal source of credit. It is due to the following reasons:
(a) Banks are not present everywhere.
(b) Collateral is required by the formal sector loan providers.
(c) Many a time, the moneylenders know the borrowers personally and willing to pay the loan without any collateral.
Question 33. Why is it necessary for the banks and the cooperative societies to increase their lending facilities in the rural areas? Explain.
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