CBSE CLASS 10 SST ECONOMICS CHAPTER MONEY AND CREDIT
Explain three reason how credit plays important for development of borrower?
answer: (i) Cheap and affordable credits would lead to higher income.
(ii) It encourages people to invest in agriculture, do business and set up small scale industries etc.
(iii) It enables more investment which will lead to acceleration of economic activities.
(iv) Affordable credit would also end the cycle of debt trap.
How money act as a medium of exchange
answer:Goods and services can be bought and sold with the use of money. For example, someone who wants shoes can buy it with money and if someone wants to sell shoes, that also can be done by receiving money. ... Money is used as a medium of exchange because it's the intermediary in the exchange process.
Explain the situation how credit pushes the borrower in to debt traps?
answer:Three situations in which credit pushes the borrower into a debt trap;
- The borrower should always be aware of his/her financial environment. If he/she borrows an amount that is beyond their financial limit and control, then it could slowly start to push him/her into a debt trap.
- Unexpected financial risk is another reason. Take the case of a farmer. He/she borrows money with the belief that the harvest season would give him/her enough returns to pay off all the loans. But unexpected disasters are more than enough to fail all the planning and push him/her into a debt trap.
- Taking financial decisions without any proper planning or prior knowledge. Along with it listening to the advice and following the words of wrong and untrustworthy people in making financial decisions can push the person into a debt trap.
Compare and contrast the formal and informal source of credit?
Differentiate between the formal and informal source of credit?
answer: Formal Source Informal Source
1. Banks require collatera
and proper documentation
for getting a loan. 1. No collateral is required.
2.A reasonable rate of
interest is charged. 2. Higher rate of interest is charged.
3. RBI supervises them. 3.There is no organisation to supervise them.
4.Terms of credit are fair and reasonable. 4. Terms of credit are very
tough and unreasonable.
5.Includes banks and cooperatives. 5.Includes moneylenders traders, employers, friends and relatives.
Define the terms:
Double coincident of wants-
answer: The occurrence when the wants of buyers and sellers both get fulfilled simultaneously in the process of exchange of mutually possessed goods is known as double coincidence of wants.
Barter system
answer:Barter is an act of trading goods or services between two or more parties without the use of money —or a monetary medium, such as a credit card. In essence, bartering involves the provision of one good or service by one party in return for another good or service from another party.
Money as medium of exchange
Answer:Money helps to facilitate trade because people in the economy generally recognize it as valuable. Money is called medium of exchange because money is a widely accepted token that can be used for exchange of any good or service. In old days, barter system was used as medium of exchange and later it was gold.
Define Credit. What are terms of credit?
answer:Credit means a loan, an agreement in which the lender (creditor) supplies the borrower with money, goods or services which is to be returned in future. Terms of credit apart from the rate of interest, collateral also includes documentation, mode of repayment.
Explain three reasons for the bank and cooperatives society to increase their lending facilities in rural areas.
answer: Banks and cooperatives should increase lending facilities in rural areas:
1. The informal sector lends at a high-interest rate in rural areas so the cost for the borrower is much more.
2. When the cost of borrowing of more, large portion of income goes in repaying loans rather than investing it.
3. Often it leads to debt trap where the amount to be repaid is more than the borrower’s income and he has to borrow more.
Why is modern currency accepted as a medium of exchange without any use of its own? Find out the reason.
answer: Modern currency is accepted as a medium oÿ exchange
because:
● It is authorised by the government of India.
● It is issued by the apex bank on behalf of the government.
● No other individual is allowed to issue currency.
● The law of the country legalises its use as a medium of payment and setting transactions.
● No one in a country can refuse payment made in the currency of that country.
How do demand deposits have the essential features of money? Explain.
answer:Demand deposits are deposits in the bank that can be withdrawn on demand. Demand deposit share-essential features oÿ money because :
● The facility of cheques against demand deposits makes it possible to directly settle payments
without the use of cash.
● Demand deposit is accepted widely as a means of payment along with currency.
Explain the term Debt-trap. Why is it more rampant in rural areas? Give two reasons.
answer: A Debt trap is a situation in which a borrower is led into a cycle of re-borrowing because they are unable to repay the loan.It is more common in rural areas because:
● A borrower repays a loan by selling the agricultural produce, which sometimes may not be enough to repay the loan.
● Rural borrowers normally depend on informal sources of credit who charge a high rate of interest. This repayment of larger amounts may sometimes be larger than their income. Thus, it can be concluded that loans from banks always help to raise people’s earning capacity.
Define Collateral. Why do lenders ask for collateral while lending?
answer: Collateral is an asset that the borrower owns (such as land, building, vehicle, livestocks, deposits with banks) & uses this as a guarantee to a lender until the loan is repaid.Lenders ask ÿor collateral while lending because:
- In case a borrower ÿails to repay the debt, the collateral can be used to generate the amount that borrower owes.
- Hence, collateral is a legal guarantee that the debtor will repay the money by all means.
Describe the utility of cheque?
answer:- Cheques have the same features of money.
- They settle payments without the use of cash.
- They are widely accepted as a means of payment.
- There pose the least risk in transaction.
- In a fair dealing, it is the most appropriate means of money transaction.
Banks play an important role in economic development of the country. Supportthe statement with examples.
answer:Banks play an important role in economic development of the country as they:
● Provide Loans: Banks keep a small portion of their deposits as cash with themselves & use major portion of it to grant loans for various economic activities.
● Acts as a link between savers & investors, i.e. people who have surplus money & those who are in need of money.
● Provide interests: Banks provide interest on the money deposited by the people. Thus, they add to the income of the family. Many ÿamilies survive on the bank interest.
● Boost industrial sectors: Banks provide cheap loans to the industries. This generates more employment & raises income thereby bringing economic development.
● Promotes development: Banks provide loans in rural areas ÿor crop production ultimately resulting in the development oÿ many places.
Write merits and demerits of ‘formal sector of credit’ in India.
answer: MERITS● Formal sector helps to meet the working capital needs of production.
● They give very low interest rate. This reduces the chance of the borrower to be trapped in a debt
trap.
● It helps in increasing earnings by making more investment.
● Helps in completing production on time.
DEMERITS
● People ÿace difficulty in obtaining loans.
● Formal sector of credit lacks credibility in rural areas.
● People don’t always have collateral or required documents.
Explain the functions of Reserve Bank of India?
answer: FUNCTIONING:● Supervises the functioning of loans in formal sector.
● Maintain checks & balances.
● It issues guidelines for fixing rate of interest on deposits and lending by banks.
● It issues currency notes on behalf of the central government.
● Periodically, the banks have to submit a report to the RBI on how much they are lending, to whom and at what interest rate.
What is the concept behind the formation of Self-Help Groups? Explain its functioning.
answer: A Self Help Group is a financial intermediary committee made up of people who share a common local area as well as a common type oÿ work or financial situation. The ideabehind its functioning is to encourage people to pool their savings & there by increase their opportunities for earnings.
● A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet & save regularly.
● Saving per member varies ÿrom 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 without a COLLATERAL.
● 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 reĀular in savings, it
becomes eligible ÿor availing loan from the bank.
Why is it necessary for banks and cooperatives to extend their lending activities in rural areas? Explain.
answer: Banks and cooperatives should increase lending facilities in rural areas:1. The informal sector lends at a high-interest rate in rural areas so the cost for the borrower is much more.
2. When the cost of borrowing of more, large portion of income goes in repaying loans rather than investing it.
3. Often it leads to debt trap where the amount to be repaid is more than the borrower's income and he has to borrow more.
Prove with arguments 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 because there is no organization which supervises the credit activities of lenders in the informal sector. They lend at whatever interest rate they want and use unfair means of getting their money back.Why is ‘Rupee’ widely accepted as a medium of exchange? Explain two reasons.
answer(i) It is accepted as a medium of exchange because the currency is authorised 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 organisation is allowed to issue currency.
(iv) Moreover, the law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India.
(v) No individual in India can legally refuse a payment made in rupees. Hence this rupee is widely accepted as a medium of exchange.
Which government body supervises the functioning of formal sources of loans in
India?
answer: Reserve Bank of IndiaWhat happens to the money that people deposit in banks?
answer: Banks use a major portion of deposits to extend loans to people.Which are the two major sources of formal loan for rural households.
answer: Two major sources of formal loan for rural household are Banks and Cooperatives.What is a cheque? answer: 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 issues.
How is demand deposits an important features of money ?
answeer:People who have deposited their money in the banks have the provision to withdraw it as and when they require. These deposits of people with the bank are called demand deposits. Demand deposits share the essential features of money because:
(i) With demand deposits, we can directly settle payments without the use of cash. The facility of cheques helps in this manner.
(ii) Along with currency, demand deposits are commonly accepted as a means of payment. Thus, they constitute money in the modern economy.
"Credit sometimes pushes the borrower into a situation from which recovery is very painful." Support the statement with examples.
answer: Bank usually refered as a formal source of credit and in some situations the borrower would not able to repay loan. This pushes them in the situation of dept trap. Example:(i) In case of rural areas if crop fails due to natural factors it will be difficult for the farmers to pay loan.
(ii) In case of failure of a business. It will be difficult for the businessman to repay the credit.
(iii) In case of informal sector, rate of interest is very high. If due to crop failure previous loan is not repaid interest rate further mounts.
(iv) In case of high risk activities failure without some support can push borrower in painful situation.
(v) In many cases people has to sell their land and fixed assets to repay loan.
Bank plays an important role in the economic development of a country. support the statement with examples
answer:
Banks play an important role in developing the economy of India by the following ways:
1) Banks keep the money of the people in its safe custody.
2) Banks give interest on the deposited money to the people.
3) Banks mediate between those who have surplus money and those who are in need of money.
4) Banks provide the loan to a large number of people at low-interest rate.
5) Banks promote agricultural and industrial sector by providing loans.
6) They also provide funds to different organizations.
Why is it necessary to increase a large number of banks mainly in rural areas? Explain.
answer: It is necessary to increase a large number of banks mainly in rural areas because:(i) The cost of informal loans is much higher and often leads to a debt trap. Also, people who might wish to start a new enterprise by borrowing may not do so because of the high cost of borrowing in such a case.
(ii) Most loans from informal lenders carry a very high interest rate and make less increase in the income of the borrowers. Thus, it is necessary that banks and cooperatives should increase their lending particularly in the rural areas, so that the dependence of the poor on informal sources of credit reduces.
(iii) It is important that the formal credit sources like banks are distributed more equally in rural and urban areas so that the poor can benefit from the cheaper loans.
why are service conditions of formal sector loans better than informal sector explain
answer: Formal sector are better than informal sector because of:-1. Low-Interest rates;
2. Transparency;
3. Supervision by the Reserve Bank of India on the functioning of the formal sector;
4. No use of unfair means for getting the money back.
Explain the values which a borrower should observe for the proper use of loan taken.
answer: 1. A borrower, firstly, needs to be financially independent as well as capable of repayment of a loan taken for various economic activities such as business set up, agricultural needs or household purposes.2. The proper utilisation of a loan is essential for repayment of loan because only successful use of the loan can help the borrower in generating profit i.e. the required amount of money for repayment or he may fall into a debt trap.
3. The ability to manage the amount of money taken as a loan is a very important attribute. The borrower needs to invest the money in a manner whereby he has sufficient part of it to buy equipment and other things as well as surplus amount (profit) in order to establish himself and also contribute towards the country’s wider development aspect.
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