NCERT Class 10 Economics Money And Credit

Money is a fascinating subject and full of curiosities. It is important to capture this element for the students. The history of money and how various forms were used at different times is an interesting story. At this stage the purpose is to allow students to realise the social situation in which these forms were used. Modern forms of money are linked to the banking system. This is the central idea of the first part of the chapter. The present situation in India, where newer forms of money are slowly spreading with computerisation of the banking system, offers many opportunities to students to explore on their own. We need not get into a formal discussion of the ‘functions of money’ but let it come up as questions. There are certain areas that are not covered such as ‘creation of money’ (money multiplier) or the backing of the modern system that may be discussed if you desire.

Credit is a crucial element in economic life and it is therefore important to first understand this in a conceptual manner. What are the aspects that one looks at in any credit arrangement and how this affects people is the main focus of the second part of the chapter. The world around us offers a tremendous variety of such arrangements and it would be ideal to explain these aspects of credit from situations that are familiar to your students. The other crucial issue of credit is its availability to all, especially the poor, and on reasonable terms. We need to emphasise that this is a right of the people and without which a large section of them would be kept out of the development process. There are many innovative interventions, such as that of Grameen Bank, that students may be made familiar with but it is important to realise that we don’t have answers to all questions. We need to find new ways and this is one of the social challenges that developing countries face.

Sources for Information

The data on formal and informal sector credit used in this chapter is drawn from the survey on rural debt by the National Sample Survey Organisation (All India Debt and Investment Survey, 2003, conducted by NSSO, Report No. 501, December 2005). The information and data on Grameen Bank is taken from newspaper reports and websites. In order to get the details of bank-related statistics or a particular detail of a bank, you can log on to the websites of Reserve Bank of India (www.rbi.org) and the concerned banks. Data on self-help groups is provided on the website of National Bank for Agriculture and Rural Development (NABARD) (www.nabard.org).

MONEY AS A MEDIUM OF EXCHANGE

The use of money spans a very large part of our everyday life. Look aroundyou and you would easily be able to identify several transactions involving money in any single day. Can you make a list of these? In many of these transactions, goods are being bought and sold with the use of money. In some of these transactions, services are being exchanged with money. For some, there might not be any actual transfer of money taking place now but a promise to pay money later. Have you ever wondered why transactions are made in money? The reason is simple. A person holding money can easily exchange it for any commodity or service that he or she might want. Thus everyone prefers to receive payments in money and then exchange the money for things that they want. Take the case of a shoe manufacturer. He wants to sell shoes in the market and buy wheat. The shoe manufacturer will first exchange shoes that he has produced for money, and then exchange the money for wheat. Imagine how much more wheat. All he has to do is find a buyer  for his shoes. Once he has exchangedhis shoes for money, he can purchase wheat or any other commodity in the market. Since money acts as an intermediate in the exchange process, it is called a medium of exchange.

MCQs :

Question. A person can withdraw money from a bank by issuing a cheque. What is a cheque?
(a) Loan taken by the bank.
(b) Loan taken by the depositor from the bank.
(c) Paper instructing the bank to pay a specific amount.
(d) Paper valid to withdraw money
Answer. C

Question. Banks give out loans and charge .......... on the loan amount from the borrower.
(a) rent
(b) wages
(c) interest
(d) money
Answer. C

Question. All the banks act as mediator between ---------------and--------------------.
a. rural people, urban people
b. literates, illiterates
c. people, government
d. depositors, borrowers
Answer. D

Question. Which of the following is not a feature of Self Help Groups (SHGs)?
a. It consists of 15-20 members or more.
b. Here members pool their savings which acts as collateral.
c. Loans are given at nominal rate of interest.
d. It is an informal source of credit.
Answer. D

Question. Organised credit is also called
a. informal credit
b. formal credit
c. cooperative credit
d. none of these
Answer. B

Question. People are involved in a variety of occupations. Match the following with the appropriate reason people might borrow money for:
              A                                                                   B
a) Auto rickshaw driver                                           I) To buy a house
b) A businessman whose factory has been closed      ii) To buy a new shop for him
c) Small trader                                                       iii) To revive his business
d) Govt. servant                                                     iv) To buy a new vehicle.
Answer. C

ASSERTION/REASON TYPE QUESTIONS:

DIRECTION : Mark the option which is most suitable :
(a) If both assertion and reason are true, and reason is the correct explanation of assertion.
(b) If both assertion and reason are true, but reason is not the correct explanation of assertion.
(c) If assertion is true, but reason is false.
(d) If both assertion and reason are false.

Question. Assertion : The modern currency is used as a medium of exchange; however, it does not have a use of its own.
Reason : Modem currency is easy to carry
Answer. B

Question. Assertion : In India, no individual can refuse to accept a payment made in rupees.
Reason : Rupee is the legal tender in India.
Answer. A

Question. Assertion : The facility of demand deposits makes it possible to settle payments without the use of cash.
Reason : Demand deposits are paper orders which make it possible to transfer money from one person’s account to another person’s account.
Answer. D

Question. Assertion : Banks keep only a small proportion of their deposits as cash with themselves.
Reason : Banks in India these days hold about 15 per cent of their deposits as cash.
Answer. B

Question. Assertion : Banks charge a higher interest rate on loans than what they offer on deposits.
Reason : The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
Answer. A

Question. Assertion : Rohan took credit in the form of advance payment from a buyer and he delivered the goods to the buyer on time and also earned profit. The credit made Rohan better off in this situation.
Reason : Credit can never push a person into a debt trap.
Answer. C

Question. Assertion : Credit would be useful or not depends on the risk involved in a situation.
Reason : The chance of benefitting from credit is highest in agriculture sector.
Answer. C

CASE STUDY Questions:

1. The Reserve Bank of India supervises the functioning of formal sources of loans. For instance, we have seen that the banks maintain a minimum cash balance out of the deposits they receive. The RBI monitors the banks in actually maintaining cash balance. Similarly, 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. Periodically, banks have to submit information to the RBI on how much they are lending, to who, at what interest rate, etc. There is no organisation which supervises the credit activities of lenders in the informal sector. They can lend at whatever interest rate they choose. There is no one to stop them from using unfair means to get their money back.

Question. Fill in the blanks_ RBI gives loans to----------------------------
1. To established cultivators, small scale industries, to small borrowers, etc.
2. To small cultivators, small scale industries, to small borrowers, etc.
3. To small cultivators, large scale industries, to small borrowers, etc.
4. Only to small scale industries
Answer. B

Question. Which organisation supervises the functioning of formal sources of loans in India?
1. The Reserve Bank of India supervises the functioning of formal sources of loans.
2. The State Bank of India supervises the functioning of formal sources of loans.
3 The Indian Bank of India supervises the functioning of formal sources of loans.
4 The Union Bank of India supervises the functioning of formal sources of loans.
Answer. A

Question. Who supervises the credit activities of lenders in the informal sector?
a. There are around three organisation which supervises the credit activities of lenders in the informal sector.
b. There are two organisation which supervises the credit activities of lenders in the informal sector.
c. There is no organisation which supervises the credit activities of lenders in the informal sector.
d. There are about four organisation which supervises the credit activities of lenders in the informal sector.
Answer. C

Question. Fill in the blanks
There is no organisation which supervises the credit activities of lenders in the--------------------
• Informal sector
• Primary sector
• Secondary sector
• Tertiary sector
Answer. A

Very Short Answer Questions 

Question. State the role of Reserve Bank of India.
Answer. (i) In India, the Reserve Bank of India issues currency notes on behalf of the Central Government.
(ii) The RBI supervises the functioning of formal sources of loans.
(iii) The RBI monitors the banks in actually maintaining cash balance.
(iv) The RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators.
(v) Any other relevant point.

Question. Which are the modern forms of money?
Answer.  The modern forms of money comprises: currency — paper notes and coins. Unlike the things that were used as money earlier, modern currency is not made of precious metals such as gold, silver, and copper. And unlike grain and cattle, they are neither of everyday use. The modern currency is without any use of its own.

Question. How do the demand deposits share the essential features of money ?
Answer. The demand deposits share the essential features of money: The facility of cheques against demand deposits make 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.

Question. What is debt-trap ?
Answer. Debt-trap - When a borrower particularly in rural area fails to repay the loan due to the failure of the crop, he is unable to repay the loan and is left worse off. This situation is commonly called debt-trap. Credit in this case pushes the borrower into a situation from which recovery is very painful.

Question. Which authority does supervise the functioning of formal sources of loans and how ?
Answer. 
1. Reserve Bank of India.
2. The RBI monitors that the banks actually maintain the cash balance. It also sees that the banks give loans to all rich as well as poor.

SHORT ANSWER questions 

Question. What do you mean by ‘Barter system’?
Answer.  Barter system refers to the system of exchange of goods and services. It is the system by which one commodity or product is exchanged for another without the use of money. Before money was introduced, people were practising barter system.

Question. What is meant by double coincidence of wants? What is its inherent problem?
Answer. Double coincidence of wants is a situation when both parties have agreed to sell and buy each other’s products or commodities. It can only work when both the persons are ready to exchange each other’s goods.

Question. What is money? Why is modern money/ currency accepted as a medium of exchange?
Answer. 
Money is a medium of exchange in transactions. A person holding money can easily exchange it for any commodity or service that he or she might want. Modem money currency is accepted as a medium of exchange because;
• it is certified for a particular denomination (For example, ₹ 10, ₹ 20, ₹ 100, ₹ 1,000).
• it is issued by the Central Bank of the country
• it is authorized by the government of the country.

Long Answer Questions 

Question. What is the difference between formal sector loans and informal sector loans? Give two examples of each. Or Mention three points of difference between the formal sector and informal sector loans
Answer. Formal Sector Loans:
(1)Comparatively rate of interest charged is lower than that of the informal sector loans.
(2) RBI supervises their function of giving loans.
(3) Collateral is required to obtain credit.
(4) Rich urban households depend largely on formal sources of credit.
(5) Examples: Banks and Co-operatives.
Informal Sector Loans:
(1) Higher interest rates on loan are charged.
(2) No organization is there to supervise its lending activities.
(3) They are ready to give loans without collateral.
(4) Poor households largely depend on informal sources.
(5) Examples : Traders, employers, money-lenders, relatives, friends, etc.

Question. What are formal sources of credit? Why do we need to expand formal sources of credit in India? Or
Why do we need to expand formal source or credit in India? Explain any four reasons. Or
Describe two reasons why banks and cooperative societies must increase their lending in rural areas.
Give three suggestions for how it can be achieved. Give two reasons.
Answer. 
(1) The formal source of credit includes a loan from banks and co-operatives.
(2) We need to expand formal sources of credit in India for the following reasons :
(i) Formal sources of credit are less risky and they charge a low rate of interest.
(ii) The Reserve Bank of India supervises the functioning of formal sources of loans. It monitors the banks in actually maintaining a cash balance.
(iii) RBI ensures that loans are given not only to the profit-making businessmen and traders but also to small cultivators, small-scale industries, small borrowers, etc.
(iv) Compared to the formal lenders, most of the informal lenders charge higher interest rates. Thus, the cost to the borrower becomes much higher that leads to less income. Also, the borrowers may become victim to debt-trap. So, formal sector loans help reduce dependence on informal sources of credit.
(v) Due to the high interest rates of the informal source of credit, people who might wish to start an enterprise by borrowing, may not do so because of the high cost of borrowing.
(vi) Cheap and affordable credit by the formal sector is crucial for the country’s development.
(3) (i) The bank should open its branches in villages.
(ii) The RBI should give guidelines to the bank to make loan procedure simpler.
(iii) Public awareness of the banks and cooperatives should be increased.

Question. “RBI plays a crucial role in controlling formal sector loan.” Explain. Or In what ways does the Reserve Bank of India supervise the functioning of banks?
Answer. 
(1) The Reserve Bank of India supervises the functioning of formal sources of credit in India. It is the central bank of India.
(2) It supervises the functioning of banks in the following ways :
(i) The RBI monitors that the banks actually maintain a minimum cash balance out of the deposits they receive. Banks in India these days, hold about 15 per cent of their deposits as cash.
(ii) RBI ensures that the banks give loans not just to profit-making business and traders but also to small cultivators, small-scale industries, small borrowers, etc.
(iii) Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rates, etc.

Please refer to attached file for NCERT Class 10 Economics Money And Credit