DAV PUBLIC SCHOOL,NTPC,FARIDABD

Ch.3 Money and Credit (Economics)

Assignment
Key Terms:
1.Double coincidence of wants: When both parties have to agree to sell and buy each others
commodities. This is known as double coincidence of wants.
2. Medium of exchange :Money acts as an intermediate in the exchange process.
3.Cheque: 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.
4.Hold Amount:Banks keep only a small proportion of their deposits as cash with themselves.
For example, banks in India these days hold about 15 per cent of their deposits as cash.
5. Collateral: It is an asset that the borrower owns (such as land, building, vehicle, livestocks,
deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.
6.The terms of credit: Interest rate, collateral and documentation requirement, and the mode of
repayment together comprise.
7.SHG: SHG has 15-20 members, usually belonging to one neighbourhood, who meet and save
regularly. 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.
Question/Answers
Q.1 In situations with high risks, credit might create further problems for the borrower.
Explain.
Ans.When a person takes credit then interest rate charges and if not paid borrower is forced to
give up collateral oe assets.The farmers faces problems of high risk as crop failure.Due to rain or
bad harvest he never repay the loan and falls in to debt trap. the There are cases in India where
non repayments of loans leads to farmer’s suicides in Maharashtra.Thus it depends on various
factors to conclude whether a credit is useful and not.
Q.2 How does money solve the problem of double coincidence of wants? Explain with an
example of your own.
Ans.When both parties have to agree to sell and buy each others commodities.This is known as
double coincidence of wants. In a barter system where goods are directly exchanged without the
use of money, double coincidence of wants is an essential feature.Money removes the the needs
of double coincidence of wants.For example A farmer no longer has to look for a shoe
maker,Who will buy his cereals(grain). If he has exchanged his cereals for money, he can
purchase any goods and services which he needs to. This is because money acts as a medieum of
exchange.
Q.3 How do banks mediate between those who have surplus money and those who
need money?
Ans.Banks Keeps a small amount as cash (15%)for themselves to pay the deposits on demand).
They use the major portion of the deposits to extend loans to those who need money. In this way
banks mediate between those who have surplus oney and those who needs money.
Q.4 Why do we need to expand formal sources of credit in India?
Ans.
1.The Reserve Bank of India supervises the functioning of forma sources of loans.
2. The RBI sees that the banks give loans not just to profit-making businesses and traders but
also to small cultivators, small scale industries, to small borrowers etc.
3. It is necessary that banks and cooperatives increase their lending particularly in the rural areas,
4. It is also necessary that everyone receives these loans. At present, it is the richer households
who receive formal credit whereas the poor have to depend on the informal sources.
5. The formal credit is distributed more equally so that the poor can benefit from the cheaper
loans.
Q.5 What is the basic idea behind the SHGs for the poor? Explain in your own words.
Ans.SHG-To provide financial resource for the poor through organizing the rural poor especially
women into small Self Help Groups.
Main objectives:
1.It organizing the rural poor into small groups(15-20 members)
2.It collects savings of the members.
3.It provides loans without collateral.
4.It provides timely loans for various purposes.
5.It provides loans at a reasonable rate of interest and on easy terms.
6.Various social issues as health and education and domestic violence also discusss t the
platform of SHG.
Q.6 What are the reasons why the banks might not be willing to lend to certain borrowers?
Ans.(i)Banks require proper and legal documents and collateral as security against loans.
(ii)The borrowers who have not repaid the loans,the banks might not be willing to lend them
further.
(iii)Those enterpreneure, who are going to invest in a business with a high risk, the banks might
not be willing to lend money.
(iv)Banks always adopt judicious loan and investment policies which ensure fair and stable
return on the funds.
Q.7 In what ways does the Reserve Bank of India supervise the functioning of banks ? Why
is this necessary?
Ans. 1.The Reserve Bank of India supervises the functioning of forma sources of loans.
2. The RBI sees that the banks give loans not just to profit-making businesses and traders but
also to small cultivators, small scale industries, to small borrowers etc.
3. It is necessary that banks and cooperatives increase their lending particularly in the rural areas,
4. It is also necessary that everyone receives these loans. At present, it is the richer households
who receive formal credit whereas the poor have to depend on the informal sources.
5.It holds a part of the cash reserve of the commercial banks.
6.RBI ensures that the banks maintain a minimum cash balance of the deposits they receive.
7.The commercial banks have to submit information to RBI on how much they are lending, to
whom and at what interest rate etc.
Q.8 Distinguish between Formal and Informal sources of Credit.
Ans.
Formal Sources Informal Sources
These sources of credit supervises by RBI and These sources of credit not supervises by RBI
its agencies. and its agencies.
It requires Collateral It does not require any type of Collareal.
The Rate of Interest is very low. The Rate of Interest is very high.
More urban people takes loans from formal More Rural people takes loans from informal
sources of Credit. sources of Credit.
Banks and Co-operatives Relatives and moneylenders.
 ART INTIGRATION

Sources of Credit

Reserve
bank of
India
Relatives

Banks &
Cooperatives Moneylenders
Neighbourers

Objectves Only for Revision

1. Which one of the following statements is most appropriate regarding transaction made in
money?
(a) It is the easiest way.
(b) It is the safest way.
(c) It is the cheapest way.
(d) It promotes trade.
Answer
2. Which one of the following is a modem form of currency?
(a) Gold
(b) Silver
(c) Copper
(d) Paper notes
Answer

3. Which among the following authorities issues currency notes on behalf of the government?
(a) Government of India
(b) The State Bank of India
(c) National Bank for Agriculture and Rural Development
(d) Reserve Bank of India
Answer

4. In which of the following systems exchange of goods is done without use of money?
(a) Credit system
(b) Barter system
(c) Banking system
(d) Collateral system
Answer

5. Banks provide a higher rate of interest on which of the following accounts?

(a) Saving account
(b) Current account
(c) Fixed deposits for long period
(d) Fixed deposits for very short period
Answer

6. Banks use the major portion of the deposits to:

(a) Keep as reserve so that people may withdraw
(b) Meet their routine expenses
(c) Extend loans
(d) Meet renovation of bank
Answer

7. What percentage of their deposits is kept as cash by the banks in India?

(a) 25%
(b) 20%
(c) 15%
(d) 10%
Answer

8. The informal source of credit does not include which one of the following?
(a) Traders
(b) Friends
(c) Cooperative Societies
(d) Moneylenders
Answer

9. Which one of the following is the new way of providing loans to the mral poor?
(a) Co-operative societies
(b) Traders
(c) Relatives and friends
(d) SHGs
Answer

Question 10. Why is currency accepted as a medium of exchange?

(a) Because the currency is authorised by the government of the country.
(b) Because it is liked by the people who use it.
(c) Because the use of currency has its origin in ancient times.
(d) Because the currency is authorised by the World Bank.
Answer

11. Who issues the currency notes in India?

(a) Currency notes are issued by the Finance Commission.
(b) All the nationalized banks can issue the currency notes.
(c) Only Reserve Bank of India can issue currency notes.
(d) Any individual or organization can issue cur¬rency notes with the permission of the govt.
Answer

12. Which among the following banks issues currency notes on behalf of the Central
Government in India?
(a) RBI
(b) State Bank of India
(c) Bank of India
(d) Central Bank of India
Answer

13. What do the banks do with the deposits which I they accept from the customers?
(a) Banks use these deposits for charitable activities.
(b) Banks use a major portion of deposits to extend loans.
(c) Banks use deposits to give bonus to their employees.
(d) Banks use deposits to set up more branches in the country.
Answer

14. What is the main source of income of a bank?

(a) Bank charges that the depositors pay for ; keeping their money safe is the main ; source of the
bank’s income.
(b) The difference between what is charged from the borrowers and paid to the depositors is the
main source of bank’s income.
(c) Banks earn huge amounts of money by investing the money of the depositors in various
company shares.
(d) The Government of India gives huge amounts of money to the banks to help their smooth
functioning.
Answer

15. An agreement in which the lender supplies the borrower with money, goods or services in
return for the promise of future payment refers to
(a) Debt
(b) Deposit
(c) Credit
(d) Collateral
Answer

16. Which body (authority) supervises the functioning of formal sources of loans?
(a) Finance Ministry
(b) Head Office of each Bank
(c) Reserve Bank
(d) Cooperative Societies
Answer

17. Money-lenders usually demand a ‘security’ from the borrower. What is the formal word used
for the ‘security’, such as land, vehicle, livestock, building, etc.?
(a) Deposit
(b) Collateral
(c) Credit
(d) Guarantee
Answer

18. Which among the following options will be the cheapest source of credit in rural areas?
(a) Bank
(b) Cooperative Society
(c) Money-lender
(d) Finance Company
Answer

19. In which country is the Grameen Bank meeting the credit needs of over 6 million poor
people?
(a) Bhuta
(b) Sri Lanka
(c) Bangladesh
(d) Nepal
Answer
20. A typical Self Help Group usually has
(a) 100-200 members
(b) 50-100 members
(c) less than 10 members
(d) 15-20 members
Answer

21. Which of the following is not an informal source of credit?

(a) Money-lender
(b) Relatives and Friends
(c) Commercial Banks
(d) Traders
Answer

22. According to Crowther, “____________ can be defined as anything that is generally

accepted as a means of exchange and at the same time acts as a measure and as a store of value.”
Answer/Explanation

23. The modern forms of money include ____________ and ____________ .

Answer/Explanation

24. A ____________ is the apex institution of monetary system of a country.

Answer/Explanation

25. Currency (coins and notes) is a ____________ which cannot be refused in payment for
transactions.
Answer/Explanation

26. The deposits in a bank which are payable on demand are called ____________ .
Answer/Explanation

27. ____________ is an agreement whereby a financial institution agrees to lend a borrower a

maximum amount of money over a given period of time.
Answer/Explanation

28. ‘Low rate of interest’ is a feature of ____________ credit.

Answer/Explanation

29. ____________ includes details regarding interest rate, collateral and documentation
requirement, and the mode of payment.
Answer/Explanation
30. The situation when it becomes impossible to repay the loan and the borrower adds on a new
debt to pay the existing one is known as _________ .
Answer/Explanation

31. Money eliminates the need for double coincidence of wants. (True/False)
Answer/Explanation

32. Credit card is a paper instructing the bank to pay a specific amount from the person’s account
to the person in whose name it has been made. (True/False)
Answer/Explanation

33. Informal sector credit includes loans from banks and cooperatives. (True/False)
Answer/Explanation

34. Rich households largely depend on informal sources of credit. (True/False)

Answer/Explanation

35. In formal sector, higher rate of interest is charged. (True/False)

Answer/Explanation

36. In rural areas, the main demand for credit is for building houses. (True/False)
Answer/Explanation

37. ‘Inculcating saving habits in community’ is an objective of Self Help Groups, (True/False)
Answer/Explanation

38. What is demonetisation?

Answer/Explanation

39. List various ways through which digital transactions are made.
Answer/Explanation

40. What is the main objective to promote digital transactions?

Answer/Explanation

41. What is meant by double coincidence of wants?

Answer/Explanation

42. What is the meaning of barter system? [Delhi 2015]

Answer/Explanation
43. Define money.
Answer/Explanation

44. Why is money called ‘a medium of exchange’? [All India 2017]

Answer/Explanation

45. What objects were used as money in India, before the introduction of coins?
Answer/Explanation

46. Which metals were used for making coins in India in later stages?
Answer/Explanation

47. Give the modem forms of money.

Answer/Explanation

48. The modern currency is accepted as a medium of exchange. Why?

Answer/Explanation

49. Why one cannot refuse a payment made in mpees in India? [Delhi 2016]
Answer/Explanation

50. Define a bank.

Answer/Explanation

51. What are demand deposits?

Answer/Explanation

52. What is a cheque? [Foreign 2015]

Answer/Explanation

53. What determines the main source of income for the banks?
Answer/Explanation

54. Define credit.

Answer/Explanation

55. For what purpose credit is mainly demanded in rural areas?

Answer/Explanation
56. What is a debt-trap?
Answer/Explanation

57. What is collateral?

Answer/Explanation

58. What are the main ‘terms of credit’?

Answer/Explanation

59. Which are the two major sources of formal loan for rural households?
Answer/Explanation

60. Who supervises the functioning of formal sources of loans?

Answer/Explanation

61. Why are banks unwilling to lend loans to small farmers?

Answer/Explanation

62. What kind of credit is cmcial for a country’s development?

Answer/Explanation

63. Besides banks, what are the other sources of credit from which the small farmers borrow?
Answer/Explanation

64. What are SHGs?

Answer/Explanation

65. What does the stock of money consist of?

Answer/Explanation

66. Who issues the currency notes in India?

Answer/Explanation

67. For which purpose are a major portion of the deposits with the banks used?
Answer/Explanation

Fill in the Blanks

1. …………. implies the direct exchange of goods
against goods without the use of money.
2. …………. may be defined as anything which is generally accepted by people in exchange of
goods and services or in repayment of debts.
3. In India, the law legalises the use of …………. as a medium of payment that cannot be
refused in settling any transaction.
4. Money as a medium of exchange has removed the problem of …………. of wants.
5. Modern forms of money include currencies which are …………. and ………….
6. …………. help in pooling the savings of their members, who are poor women to meet their
credit needs.
7. The share of formal sector credit is …………. for the richer households as compared to the
poor households in India.
8. Absence of …………. as a guarantee is a major cause that prevents poor people from
obtaining loans from formal sector sources, such as commercial banks.
Answers(Fill in the Blanks)
1. Barter system
2. Money
3. rupee
4. double coincidence
5. paper notes, coins
6. Self Help Groups
7. higher
8. collateral