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Economics Notes CBSE 10th Class

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Published in: Economics
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Chapter 3

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  1. CHAPTER-3 MONEY AND CREDIT ECONOMICS Textual Questions Q.l: In situations with high risks, credit might create further problems for the borrower. Explain. Ans: Whether a credit would be useful or not, will depend on a number of factors like - risks involve whether there is some support against a loss, terms of credit etc. It is a fact that in situations with high risk credit might create further problems for the borrower. For example, credit taken by farmers for cultivatio might create problems for the farmer at some times. Crop production involves high costs on inputs such a H YV seeds, fertilizers, pesticides, irrigation etc. Farmers generally take loans at the beginning of the seaso and repay the loan after harvest. But the failure of the crop makes loan repayment impossible. Then in ord to repay the loan sometimes, they become bound to sell part of their land. So, their situations become wors than before. The incidences of farmers' suicides especially in Maharashtra are the burning examples of thi situation. Thus, whether a credit would be useful or not, depends on the various risks involved in the situation. Q.2: How does money solve the problem of double coincidence of wants? Explain with example of you own. Ans: In a barter system where goods are directly exchanged without the use of money, double coincidence o wants is an essential feature. By serving as a medium of exchanges, money removes the need for doubl coincidence of wants and the difficulties associated with the barter system. For example, it is no long necessary for the farmer to look for a book publisher who will buy his cereals at the same time sell hi books. All he has to do is find a buyer for his cereals. If he has exchanged his cereals for money, he ca purchase any goods or service which he needs. This is because money acts as a medium of exchange. Q.3: How do banks mediate between those who have surplus money and those who need money? Ans: We know that banks accept the deposits from the people who have surplus money and also pay a interest on the deposits. But banks keep only a small portion (15 per cent in India) of their deposits as cash with themselves. This i kept as provision to pay the depositors who might come to withdraw money from their accounts in the ban on any day. They use the major portion of the deposits to extend loans to those who need money. In this wa banks mediate between those who have surplus money and those who need money. Q.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 Government" are written on top. In India, Reserve Bank of India issues currency notes on behalf of the central government. The stateme means that the currency is authorized or guaranteed by the Central Government. That is, Indian law legalize the use of rupee as a medium of payment that can not be refused in setting transaction in India. Q.5: Why do we need to expand formal sources of credit in India? Ans: We need to expand formal sources of credit in India for many reasons:
  2. 1. Compared to formal lenders, most of the informal lenders charge much higher interest rates on loans lik 3% to 5% per month i.e. 36% a year. 2. Besides the high interest rate, informal lenders impose various other tough conditions. For example, the make the farmers promise to sell the crop to him at a low price. There is no such condition in formal sector. 3. Informal lenders do not treat well with the borrowers. On the other hand, there is no such situation no suc situation in the formal sector. 4. The Reserve Bank of India supervises the functioning of formal sources of loans. In contrast, there n organization which supervises the credit activities of lenders in the informal sector. 5. Loans taken by poor people from informal lenders sometimes, lead them to debt-trap because of hig interest rate. 6. The formal sources of credit in India still meets only about half of the total credit needs of the rural peopl So, it is necessary that the formal sources of credit expand their lending especially in rural areas, so that th dependence on informal sources of credit reduces as this will also help in the development of the country. Q.6: What is the basic idea behind the SHGs for the poor? Explain in your own words. Ans: The basic behind the SHGs is to provide a financial resource for the poor through organizing the rur poor especially women, into small Self Help Groups. They also provide timely loans at a responsible intere rate without collateral. Thus, the main objectives of the SHGs are: 1. To organize rural poor especially women into small Self Help Groups. 2. To collect savings of their members. 3. To provide loans without collateral. 4. To provide timely loans for a variety of purposes. 5. To provide loans at responsible rate of interest and easy terms. 6. Provide platform to discuss and act on a variety of social issues such education, health, nutrition, domesti violence etc. Q.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 certain borrowers due to the following reasons: (a) Banks require proper documents and collateral as security against loans. Some persons fail to meet thes requirements. (b) The borrowers who have not repaid previous loans, the banks might not be willing to lend them further. (c) The banks might not be willing to lend those entrepreneurs who are going to invest in the business wit high risks. (d) One of the principle objectives of a bank is to earn more profits after meeting a number of expenses. Fo this purpose it has to adopt judicious loan and investment policies which ensure fair and stable return on th funds. Q.8: In what ways does the Reserve Bank of India supervise the functions of Banks? Why is thi necessary? Ans: The Reserve Bank of India supervises the functions of banks in a number of ways: 1. The commercial banks are required to hold part of their cash reserves with their RBI. RBI ensures that th banks maintain a minimum cash balance out of the deposits they receive.
  3. 2. RBI observes that the banks give loans not just to profit making businesses and traders but also to sma cultivators, small scale industries, small borrowers etc. 3. The commercial banks have to submit information to the RBI on how much they are lending, to whom, what interest rate etc. This is necessary to ensure equality in the economy of the country and protect especially small depositor farmers, small scale industries, small borrowers etc. In this process RBI also acts as the lender of the la resort to the banks. Q.9: Analyze the role of credit for development. Ans: Cheap and affordable credit plays a crucial role for the country' s development. There is a huge demand for loans for various economic activities. The credit helps people to meet th ongoing expenses of production and thereby develop their business. Many people could then borrow for variety of different needs. They could grow crops, do business, set up industries etc. In this way credit play a vital role in the development of a country. Q.IO: Manav needs a loan to set up a small business. On what basis will Manav decide whether t borrow from the bank or the moneylender? Discuss. Ans: Manav will decide whether to borrow from the bank or the money lenderon the basis of the followin terms of credit: (a) rate of interest (b) requirements availability of collateral and documentation required by banker. (c) mode of repayment. Depending on these factors and of course, easier terms of repayment, Manav has to decide whether he has t borrow from the bank or the moneylender. Q.ll: In India about 80 per cent of farmers are small farmers, who need for cultivation. (a) Why might banks be unwilling to lend to small farmers? (b) What are the other sources from which the small farmers can borrow? (c) Explain with an example how the terms of credit can be unfavourable for the small farmer. (d) Suggest some ways by which small farmers can get cheap credit. Ans: (a) Bank loans require proper documents and collateral as security against loans. But most of the time the small farmers lack in providing such documents and collateral. Besides, at times they even fail to repa the loan in time because of the uncertainty of the crop. So, banks might be unwilling to lend to small farmers (b) Apart from bank, the small farmers can borrow from local money lenders, agricultural traders, bi landlords, cooperatives, SHGs etc. (c) The terms of credit can be unfavourable for the small farmer which can be explained by the following - Ramu, a small farmer borrows from a local moneylender at a high rate of interest i.e. 3 per cent to grow rice But the crop is hit by drought and it fails. As a result Ramu has to sell a part of land to repay the loan. No his condition becomes worse than before. (d) The small farmers can get cheap credit from the different sources like — Banks, Agricultur Cooperatives, and SHGs. Q.12: Fill in the blanks: (i) Majority of the credit needs of the sources. households are met from inform
  4. (ii) (iii) (iv) to the lender. costs of borrowing increase the debt burden. issues currency notes on behalf of the Central Government. is an asset that the borrower owns and uses as a guarantee until the loan is repai Ans: (i) poor (ii) high (iii) RBI (iv) deposits (v) collateral Extra Questions QI. Give the meaning and functions of money. Ans. Meaning of money: Money may be anything chosen by common consent as a medium of exchange an measure of value. Functions of money: (A) Primary functions: (a) Medium of exchange (b) Medium of value (B) Secondary functions: (a) Store of value (b) Standard of deferred payments (c) Transfer of value (C) Contingent functions: (a) Basis of credit (b) Liquidity (c) Maximum utilization of resources (d) Guarantor of solvency (e) Distribution of National Income Q2. What monetary system does India follow? Ans. (a) India has adopted a representative paper currency or the managed currency standard. (b) The monetary standard is synonymous with the standard money adopted. Paper currency in India i the unlimited legal tender i.e. it is used to settle debts and make payments against all transactions. (c) RBI (The Reserve Bank of India) issues all currency notes and coins except one rupee notes an coins which are issued by the ministry of finance. (d) The system governing note issues the minimum reserve system viz. certain quantity of gold is ke in reserve. Q3. What is banking? Give the main features of commercial banking. Ans. Banking is defined as the accepting of deposits for the purpose of lending or investment deposited money by the public, repayable on demand or otherwise and withdrawal by cheque, draft ord or otherwise. Main features of commercial banks are as follows: (i) It deals with money, it accepts deposits and advances loans. (ii) It also deals with credit, it has the power to create credit. (iii) It is a commercial institution, whose aim is to earn profit. (iv) It is a unique financial institution that creates demand. (v) It deals with the general public. Q.4: What is money ? Ans. Money is a medium of exchange and measure of value.
  5. Q.5: What are the different kinds/types/forms of money ? Ans. Money can be classified into the following types or forms:- (i) Coins such as gold, silver, copper coins. (ii) Paper notes, (iii) Fiat money, (iv) Credit money or deposits with Banks, and (v) Commodity money in the form of grains, cattle etc. Q.6 What is the meaning of "double coincidence of wants" ? Ans. When two parties agree to sell and buy each others commodities, this situation is known as doubl coincidence of wants. That is, what a person desires to sell is exactly what the other wishes to buy. In a barte system, where goods are directly exchanged for another type of goods or service without the use of mone double coincidence of wants is a must. Q.7: What is "Barter System" ? Ans. It is the system in which one type of goods or service is directly exchanged for another type of goods o service without the use of money. Double coincidence of wants is an essential feature of this system. Befor the evolution of money, exchange was done through this system. Q.8: Why money is called a medium of exchange? Ans. Since money acts as an intermediate in the exchange process, it is called a medium of exchange. Q.9: Define - (a) Credit (b) Terms of Credit (c) Collateral (d) Fiat Money (e) Cheque (f) Deman Deposits Ans. Credit : Credit or Loan refers to an agreement in which the lender supplies the borrower with mone goods or services in return for the promise of future payment. Credit is a crucial element in economic life an plays an important role in the development of the country. Terms of Credit : The interest rate, collateral, documentation requirement and the mode of payment are th various factors which together comprise the "Terms of Credit". Collateral : Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until th loan is repaid. Collaterals can be land, building, vehicle, stocks, cattle, bank deposits etc. Fiat Money : The 'Fiat Money' is meant for that money which serves as money on the basis of fiat or orde of government. Cheque : A cheque is a paper instructing the bank to pay a specific amount from the person's account to th person in whose name the cheque has been made. Demand Deposits : The deposits in the bank account which can be withdrawn on demand are known a Demand Deposits'. Q.IO: How does the use of money make it easier to exchange things ? Ans. As we know, in a barter system where goods are directly exchanged without the use of money, doubl coincidence of wants is a necessary condition. By serving as a medium of exchange, money removes th need for double coincidence of wants and the difficulties associated with barter system. In this way, the us of money makes it easier to exchange things.
  6. Q.ll: Can you think of some examples of good services being exchanged or wages being paid throug barter ? Ans. Yes, in rural areas generally crops and food-grains are directly exchanged without the use of mone Similarly, agricultural labourers are normally paid not in cash but in kind, e.g. 5kg. wheat or rice per day. Q.12: Mr. Salim wants to withdraw Rs 20,000 in cash for making payments. How would he write cheque to withdraw money ? Ans. Mr.Salim would write date on the space given. He would instruct the bank to pay 'Self' and also writ Twenty thousands only' further to Rupees and fill up the amount and account number e.g. '20000/-'etc. the proper spaces as mentioned over the cheque. Then he would have to put his signature on the right han lower side of the cheque. Now he would submit it on the counter of the bank. Q.13: Why were demand deposits considered as money ? Ans. Since demand deposits are accepted widely as a means of payment along with currency, they are als considered as money in the modern economy. Q.14: What would happen if all the depositors went to ask for their money at the same time ? Ans. Bank would not be able to give money to the depositors if they all went to ask for their money all at th same time. This is because, banks keep only about 15% and would have already used the balance d portion o their deposits to extend loans. Q. 15: What were the reasons that make Swapna's situations so risky ? Discuss factors: pesticides, rol of money lenders, climate. Ans. Pest attack, exploitation by money lenders and lack of monsoon are the reasons that make Swapna' situation so risky. Pesticides — Pest attack can be controlled by pesticides. Role of Moneylenders — Generally moneylenders exploit farmers. They charge very high rate of interest an keep them in debt-trap. Climate — Nearly 60% of our agricultural land area are still un-irrigated. Our farmers heavily depend o rainfall. So, climate plays a vital role in agriculture. Q.16: Why do lenders ask for collateral while lending ? Ans. Lenders ask for collateral as security against loans. If the borrower fails to repay the loan, the lender ha the right to sell the asset or collateral to recover the payment. Q.17: Given that a large number of people in our country are poor, does it in any way affect thei capacity to borrow? Ans. Lenders ask for collateral as security against loans. If the borrowers fail to repay the loan, the lend has the right to sell the asset or collateral to recover the loan amount. Q.18: Fill in the blanks choosing correct option from the brackets: While taking a loan, borrowers look for easy terms of credit. This means (low/high) interes rate, (easy/tough) conditions for repayment, (less/more) collateral an documentation requirements.
  7. Ans. low, easy, less. Q.19: List the various sources of credit in Sonpur. Ans. The various sources of credit in Sonpur are 1. village moneylender 2. agricultural trader 3. landowner-employers. 4. bank. Q.20: Why will Arun have higher income from cultivation compared to Shyamal ? Ans. Arun will have higher income from cultivation compared to Shyamal. This has following reasons: 1. Arun has 7 acres of land compared to 1.5 acres land of Shyamal. 2. Arun received bank loans at an interest rate of only 8.5% per annum. On the other hand Shyamal ha received loan at an interest rate of 36% per annum which is much higher than Arun' s. 3. Arun has to repay loan anytime in the next three years while Shyamal will have to repay within 3- months. 4. Shyamal received loan under the condition that he will sell the crop to the trader at a lower price than th market price while there no such condition with Arun. Q.21: Can everyone in Sonepur get credit at a cheap rate ? Who are the people who can ? Ans. No, everyone in Sonepur cannot get credit at a cheap rate. This is because, collateral is required fo taking bank loan at cheap rate. Only those people, who can fulfill collateral and documentation requirements, get credit from bank at a muc rate. Q.22: What are the differences between formal and informal sources of credit ? Ans. The various differences between formal and informal sources of credit are shown in the following table Formal Sources of Credit They cover those sources of credit which are registered by the Government and have to follow its rules and regulations e.g. Banks, Cooperatives. The RBI supervises the functioning of formal sources of credit. Apart from profit-making, they have also an objective of social welfare. The rate of interest charged by formal sources is always much lower than that of informal sources. The terms of credit are also fair and reasonable. Informal Sources of Credit They include those small and scattered units which are outside the control of the Government e.g. individual moneylenders, traders, employers, etc. There is no organizational supervision or adherence to rules and regulations in the credit extending activities in this sector. Their only motive is to extract profit as much as possible. They charge random and much higher interests in comparison to formal sectors. They impose very tough and sometimes even, unreasonable terms of credit on the borrower. Q.23: Why should credit at reasonable rates be available for all ?
  8. Ans. Credit should be available at reasonable rates for all as otherwise it will not be useful for the borrowe Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay th loans. Credit given at high interest rate can sometimes result into the amount to be repaid is greater than th income of the borrower. This could lead to increasing debt and debt-trap as we saw for Rama in Sonpur. Credit is a crucial element in economic activities. It has a major role in the development of the country as helps people in setting up their business, in increasing their earnings and social status. Therefore, cheap an affordable credit is crucial for the country' s development. Q.24: Why do you think that the share of formal sector credit is higher for the richer households a compared to the poorer households ? Ans. Undoubtedly, the share of formal sector credit is for the richer households as compared to the poor households. It is because; poverty affects poor households' capacity to borrow. Formal sector credit require proper documents and collateral as security against loans. But poor people lack in providing such thing which affect their capacity to get loans from formal sector. That is why, the formal sectors are sometimes, unwilling to lend to poor households and thus, their share o formal sector credit is lower than the rich households.

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