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Notes - Money & Credit - Class X - Economics

This document provides notes on Chapter 3 (Money and Credit) of the Economics textbook for Class X students of Delhi Public School Bulandshahr. It discusses key topics such as the functions of money as a medium of exchange, the difficulties of barter systems including the double coincidence of wants problem, modern forms of money including currency and bank deposits, and the loan activities of banks.

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443 views4 pages

Notes - Money & Credit - Class X - Economics

This document provides notes on Chapter 3 (Money and Credit) of the Economics textbook for Class X students of Delhi Public School Bulandshahr. It discusses key topics such as the functions of money as a medium of exchange, the difficulties of barter systems including the double coincidence of wants problem, modern forms of money including currency and bank deposits, and the loan activities of banks.

Uploaded by

abhinavsinghbaliyanraghuvanshi
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© © All Rights Reserved
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DELHI PUBLIC SCHOOL BULANDSHAHR

CLASS- X
ECONOMICS NOTES
CHAPTER- 3
MONEY AND CREDIT

Money as a Medium of Exchange


The use of money forms a very large part of our everyday life. Money acts as an intermediate in the
exchange process & it is called medium of exchange. In many of our day to day transactions, goods are
being bought & sold with the use of money.
Money is referred to as a medium of exchange because it serves as an intermediary in the exchange
process. The reason as to why transactions are made in money is that, a person holding money can easily
exchange it for any commodity or service that he or she wants.

Double Coincidence of Wants: It occurs when both parties agree to sell and buy each other's
commodities at the same time in the trade. Double coincidence of wants is a key element of the barter

system.
Example: Suppose a person has a cow and he want to exchange it for a bicycle. However, finding someone
who both has a bicycle and wants a cow can be quite challenging. The double coincidence of wants problem
arises because the person who has a bicycle may not be interested in owning a cow, or they may not have
anything you desire in exchange for your cow. Therefore, it becomes a complex and time-consuming process
to find a suitable trading partner who has what you want and wants what you have.
In a barter system, double coincidence of wants is an essential feature, where goods are directly exchanged
without the use of money. While in an economy, we see where all money is being used, money serves
as the crucial intermediate step which eliminates the need for double coincidence of wants.

Barter System
Barter refers to the direct exchange of goods and services. In this way, the barter system refers to the system
by which one commodity is exchanged for another without the use of money.
Difficulties of Barter System

• Double coincident of wants is an essential feature


• Lack of standard measurement of value
• Difficult to store or keep the things Money in Economy
• Problem of divisibility
• Deferred payment was not possible

Modern Forms of Money

In the early ages, Indians used grains and cattle as money.


Thereafter came the use of metallic coins, such as gold, silver, copper coins, which lasted well into the

twentieth century.

Now, the modern forms of money include currency – paper notes, coins and deposits. The modern
forms of money – currency and deposits – are closely linked to the workings of the modern banking system.

Currency

In India, the Reserve Bank of India issues currency notes on behalf of the Central Government. No
other individual or organisation is allowed to issue currency or print money. The rupee is widely accepted as
a medium of exchange in India.

Modern currency or rupee is accepted as a medium of exchange because:

(i) Modern currency is authorised by the government of a country.


(ii) In India, the Reserve Bank of India issues all currency notes on behalf of the Central Government.
(iii) No other individual or organisation is allowed to issue currency.
(iv) 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.
Deposits in Banks

The other form in which people hold money is as deposits with banks. People need only some currency for
their day to day needs. People deposit their extra cash with the banks by opening a bank account in their
name. Banks accept the deposits and also pay an amount as interest on the deposits.

 The deposits in the bank accounts can be withdrawn on demand; these deposits are called demand
deposits. Another essential feature of demand deposits is cheques. At times, the payments are made by
cheque instead of cash.
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.

Features of demand deposit:

(i) Banks accept the deposits and also pay an interest rate on the deposits. In this way, people’s money is safe
with the banks and it also earns interest.
(ii) The facility of cheques against demand deposits makes it possible to directly settle payments without the
use of cash. Since demand deposits are accepted widely as a means of payment, along with currency, they
constitute money in the modern economy.
(iii) It is authorised by the government of the country.
Loan Activities of Banks
Banks keep only a small proportion of their deposits as cash with themselves. In India, banks now
maintain approximately 15% of their deposits in cash. This is kept as a provision to pay the depositors
who might come to withdraw money from the bank on any given day. Banks use the major portion of the
deposits to extend loans. In this way, banks mediate between those who have surplus money and those
who need money.

There is a huge demand for loans for various economic activities. Banks charge a higher interest rate on
loans than what they offer on deposits. The difference between what is charged by borrowers and what
is paid to depositors is their main source of income for banks.

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