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    898d1d4b37eacab920cc691697862972

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    898d1d4b37eacab920cc691697862972

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    of 4

    DELHI PUBLIC SCHOOL, BANGALORE NORTH

    CLASS:X MONEY AND CREDIT

    Note book questions

    1. How does the use of money make it easier to exchange things?

    It is easy to exchange things with the use of money because money acts as a ‘standard mode
    of payment’ involving transactions. For example – Suppose a shoe manufacturer wishes to
    sell his shoes and buy wheat. He would sell his shoes in the market for money and then use
    the money to buy wheat. However, if he had to sell his shoes in exchange for wheat without
    the use of money, he would have to first find a person willing to buy his shoes and at the
    same time also ready to give wheat.

    The use of money therefore is convenient.

    Money solves the problem of double coincidence of wants (as explained in the above
    example), wherein the buyer and the seller need to settle according to specific conditions
    suitable to both of them at the same time, leading to a lot of inflexibility in the transaction.

    2. Demand deposits share the essential features of money. Explain.

    Demand deposits share an essential feature of money. Since the deposits in the bank
    accounts can be withdrawn on demand. They are called demand deposits. Through this our
    cash will be protected and we also get certain amount of interest. Demand deposits open an
    opportunity for making transactions through cheques

    3. What are the modern forms of money? The modern currency is without any use of its
    own. Then, why is it accepted as a medium of exchange?

    The modern forms of money include currency - paper notes and coins.

    Modern currency is accepted as a medium of exchange without any use of its own because:
    1) Modern currency is authorized by the government of a country.

    2) In India, the Reserve Bank of India issues all currency notes on behalf of central
    Government.

    3) No other individual or organization is allowed to issue currency.

    4. Briefly explain the two different credit situations with suitable examples.

    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.

    5. What do the banks do with the deposits which they accept from the public?

    (i) Banks keep only a small portion of the deposits as cash (about 15 per cent of their
    deposits as cash).

    (ii) This is kept as provision to pay the depositors who might come to withdraw money from
    the bank on any given day.

    (iii) Banks use the major portion of the deposits to extend loans.

    (iv) There is a huge demand for loans for various economic activities. Banks make use of the
    deposits to meet the loan requirements of the people.

    (v) In this way, banks mediate between those who have surplus funds (depositors) and
    those who are in need of these funds (borrowers).

    (vi) Banks charge a higher rate of interest on loans than what they offer on deposits.

    (vii) The difference between what is charged from borrowers and what is paid to depositors
    is their main source of income.

    6. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is
    this necessary?

    RBI supervises the Indian banks in the following manner:


    (i) The Commercial banks are required to maintain a minimum cash balance out of the
    deposits they receive.

    (ii) The RBI monitors that the banks actually maintain the cash balance.

    (iii) The RBI sees that the banks give loan not just to profit-making businesses and traders
    but also to small cultivators, small-scale industries, small borrowers, etc.

    (iv) Periodically, banks have to submit information to the RBI on how much they are lending,
    to whom, at what interest rate, etc.

    7. Explain the terms of credit.

    Interest rate, collateral and documentation requirement, and the mode of repayment
    together comprise what is called the terms of credit.
    The four terms of credit are-
    1. Interest rates- The interest rate is the rate that is decided while borrowing and lending
    loans, interest rate is mentioned in the document.
    2. Collateral- It is an asset that the borrower owns like a house, shop, property, etc. It is used
    to take loans.
    3. Documentation required- The borrowers before lending money check all the documents
    related to the employment record and income earned by the borrower.
    4. Mode of payment- It is the duration in which the loan is to be repaid. long term loans can
    be repaid in 12 months, 6 months, or monthly installments.

    8. What are the differences between formal and informal sources of credit?

    Formal sources:

    (i) They follow those sources of credit, which are registered by the government and have to
    follow its rules and regulations.

    (ii) RBI supervises the functioning of formal sources of credit.

    (iii) They generally charge lower rates of interest.

    (iv) Their main motive is social welfare.

    Example: Banks and cooperatives.

    Informal sources:
    (i) These include those small and scattered units which are largely outside the control of the
    government.

    (ii) There is no organisation which supervises the credit activities.

    (iii) They charge much higher rates of interest.

    (iv) Their main motive is profit-making.

    Example: Money lenders, Friends, Relatives

    9. Why should credit at reasonable rates be available to all?

    i). Informal credit tries to exploit the poor farmers and workers by charging a very high rate
    of interest on loans and imposing unreasonable terms of credit.

    ii)The credit should be available at reasonable rates for all because through this reasonable
    rate and equality poor people would be able to borrow for their work of cultivation and
    other things too. This will make their life easy and far better than ever before. Suicidal
    attempts will be decreased as we know that because of inability of paying debts many
    farmers suicide. So credit at reasonable rates will put the life of farmers at ease.

    iii). At present rich households avail the benefits of formal credit and poor have to depend
    on the informal sources due to some weak point like absence of collateral security etc.

    iv). Therefore it should be ensured that formal credit should provide credit at reasonable
    rates to all and especially poor ones to help them fulfill their needs.

    10. Describe any three advantages of the Self Help Groups for the poor.

    The advantages of Self-Help Groups for the poor are:

    They help the poor to become self-reliant in terms of savings and generating income as the
    decisions regarding savings are taken by the group members.

    They avail the facilities of loans from formal sources like banks at low rate of interest. They
    create self-employment opportunities by discussion within their group.

    They make it possible for the poor to avail timely finance without any collateral.

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