Money And Credit - Class 10 Economics - Extra Questions

Fill in the blanks with appropriate words in the following sentences.
In olden days the goods were exchanged for goods, which was called _____________ system of exchange.

Barter system is a system of exchange where the persons involved in a transaction exchanged goods or services for other goods or services without using a medium of exchange, such as money.


How does money solve the problem of double coincidence of wants? Explain with an example of your own.

Money solves the problem of double coincidence of wants by acting as a medium of exchange. Double coincidence of wants implies a situation where two parties agree to sell and buy each other’s commodities., i.e., what one party desires to sell is exactly what the other party wishes to buy. Money does away with this tedious and complex situation by acting as a medium of exchange that can be used for one and all commodities. For example, if an ice-cream vendor wants a bicycle but the bicycle manufacturer wants clothes, and not ice-creams, then the vendor can use money to obtain a bicycle. He does need to adhere to the bicycle man’s needs because money acts as the common medium of exchange. Similarly, the bicycle manufacturer can then use the money to buy clothes.



Why was money invented? Give two reasons. 

Money was invented because of the following reasons:

1. As the multiplicity of wants and greater need for exchange proved barter system to an inefficient system.
2. It came into existence as commonly accepted as a medium of exchange.



Define money.

Money is the universally accepted medium of exchange. To smoothen the process of transaction, an intermediate good is necessary which is acceptable to both parties, such a good is called money. 


List various difficulties faced under the barter system of exchange.

The various difficulties faced under the barter system of exchange are:

1. Exchange of goods remained extremely limited.

2. Lack of a common unit of value.

3. Contractual or future payments were very difficult under barter system of exchange.

4. Waiting for the appropriate person was a discomfort.


Explain various stages in evolution of money.

Money has evolved through different stages according to the time, place and circumstances. Some of the major stages through which money has evolved are as follows: (i) Commodity Money (ii) Metallic Money (iii) Paper Money (iv) Credit Money (v) Plastic Money.



What does the terms of credit include?

Credit means a loan, an agreement in which the lender (creditor) supplies the borrower with money, goods or services which is to be returned in future. Terms of credit apart from the rate of interest, collateral also includes documentation, mode of repayment.

 



Differentiate between Standard money and Bank money.

1:Standard money is a monetary unit which is designated by a government to serve as the basis of its currency system and into which other types of money in the country are convertible — compare the standard of value.
2: Bank Money can be defined as anything that acts as a medium of exchange, store of value, and unit of accounting to facilitate economic activities and transactions. E.g. Currency – paper notes and coins, Demand Deposits, Bankers Cheque.



What is the basic idea behind SHGs for the poor? Explain in your own words.

SHG is a mutual help group.
They come together to solve their economic issues and earn income.
SHGs provide loans to group members without collateral and at cheaper rates of interest.
Economic empowerment of women.


Why do we need to expand formal sources of credit in India?

We need formal sources of credit in order to reduce the dependence of farmers on informal sources of credit like money lenders.
To reduce the higher risk associated with informal sources of credit because of fluctuating terms and conditions. 
To avail cheaper credit to farmers in rural areas.


State two qualities of a good monetary unit.

The two qualities of a good monetary unit are:

1:General acceptance: The very first quality of good money is acceptability; it should be acceptable to all, without any hesitation in the exchange for goods and services.

2:Portable: It should be easily transferable from one place to another place or from one people to another, for doing business and making payment. The paper money is easier to carry because it has minimum possible wait than metallic money.



Why the banks might not be willing to lend to certain borrowers?

  1. Banks will not provide loans to loan defaulters.
  2. Banks usually don't lend to business or firms with high risks associated.
  3. The documentation needed by the banks is sometimes very heavy.
  4. Banks need some form of collateral security for some loans. 


Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss.

Mr. Manav will decide whether to get a loan from the bank or money lenders on the basis of rates of interest, terms and conditions, the documents required, the mode of repayment and source of credit location.


'Credit has its own unique role for development'. Justify the statement with arguments.

It is through availability of cheap, affordable and timely credit that the development can be triggered
Credit has its own unique role for development because of following reasons :
 (i) Cheap and affordable credit lead to higher incomes and many people could then borrow cheaply for a variety of needs. 
(ii) With credit people could grow crops, do business, set-up small scale industries etc.


How the credit needs of poor households are mostly met?

  • Majority of the credit needs of poor households are met from informal sources.
  • Poor households often get exploited with higher interest from money lenders.
  • Poor households borrow money from money lenders because they don't have any form of security (collateral) as requested by the formal sources of credit.


How is money used as a medium of exchange? Explain with examples.

Goods and services can be bought and sold with the use of money. For example, someone who wants shoes can buy it with money and if someone wants to sell shoes, that also can be done by receiving money. ... Money is used as a medium of exchange because it's the intermediary in the exchange process.


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

The Reserve Bank of India monitors the amount of money that banks loan out, and also the amount of cash balance maintained by them. It also ensures that banks give out loans not just to profiteering businesses but also to small cultivators, small-scale industries and small borrowers. Periodically, banks are supposed to submit information to the RBI on the amounts lent to whom and at what rates of interest.

This monitoring is necessary to ensure that equality is preserved in the financial sector, and that small industries are also given an outlet to grow. This is also done to make sure that banks do not loan out more money than they are supposed to, as this can lead to situations like the Great Depression of the 1930s in the USA, which greatly affected the world economy as well.



How does use of money solve the problem of 'lack of double coincidence of wants' that existed under the barter system?

Suppose a person possess rice and wants to exchange it for wheat. Under the barter system he had to find out a person who not had wheat but also wants rice. But such a double coincidence was a rare-possibility. With the use of money, all the commodities can be easily exchanged and you do not need double coincidence of wants.



Which government body supervises the functioning of formal sources of loans in India? Explain its functioning.

Reserve Bank Of India (RBI)  supervises the functioning of formal sources of loans in India.
RBI monitors the functioning of formal sources of credit.
RBI insure that they give loans not only to profit making businesses but also to poor people and small traders.


Differentiate between the following: Limited legal tender and Unlimited legal tender

Limited legal tendersUnlimited legal tenders
The coins of smaller denominations are considered as limited legal tenders (say $$1/2/5$$ rupee coins) because they are acceptable only for meeting financial transactions of lower value (say, meeting your short distance bus/auto fare.)The rupee notes of higher denominations (say $$100/500/1000$$ rupee notes) are considered as unlimited legal tenders because they can be used for settling claims relating to high value transactions.


How does money act as a store of value?

Money acts as a store of value. It means people can store their wealth in the form of money. Money is the most liquid form of wealth and it can be stored without loss in value. Money enables people to save a part of their current income and store it for future use.



Explain with an example, how credit plays a vital and positive role for development.

  • Credit plays a crucial role in a country’s development. By sanctioning loans to developing industries and trade, banks provide them with the necessary aid for improvement.
  • This leads to increase in the production, profits and employment. However, caution must be exercised in the case of loans from the informal sector which include high interest rates that may be more harmful than good.
  • For this reason, it is important that the formal sector gives out more loans so that borrowers are not duped by moneylenders, and can ultimately contribute to national development.
  • For example- A loan given to a fresh post-graduate for setting up a business might contribute to employment generation, infrastructure development in the near future.


What is a difference between a loan and an overdraft? 

Loan: The bank sanctions a lump sum advance credited to the account of the borrower in one go. The interest is charged on the amount he has borrowed.
Overdraft: Overdraft allows the customer to draw cheques in excess of the balance standing in his current account. The interest is charged only on the amount over drawn.


Distinguish between demand deposits and fixed deposits.

Fixed deposit: It is a saving account which cannot be withdrawn until the maturity date. It can only be withdrawn after a prior notice.

Demand deposit: Depositors can withdraw any or all of the funds in a demand deposit account at any time without penalty or prior notice required.


Write any two difficulties of barter system.

Tow difficulties of bater system:-
1) Double coincidence of wants:- Owning to lack of generally acceptable medium of exchange, a difficult problem of double coincidence of wants was faced by the persons who wanted to sell and buy goods. For exchange of goods persons desiring to exchange goods must specifically want those goods what others offers in exchange. Thus, an individual who wants to have a good he must locate another person who offers to give up the good wanted by him and who is willing to accept in ex­change the good offered by him.
2) Lack if information:-

Another problem found in the barter system was that in it traders re­quired a good deal of information for exchange of goods. For example, if Some one wants to have a saw in exchange of a wooden table which he has made. Not only should he be able to assess the value of saw but the maker of a saw should also be able to determine the value of the wooden table which he wishes to exchange. All this required a lot of information about goods for which people must spend a good deal of time and resources to obtain such information.



Give any three suggestions to increase formal sources of loan in rural areas of India.

Three suggestions to increase formal sources of loan in rural areas:-
  • The numbers of Regional Rural Banks should be increased.
  • The government should provide short term and long term loan at the time of emergency like flood or famine.
  • The number of land development bank should be increased.


What are self-help groups?

Self Help groups are groups of rural poor people (especially women). The idea is to help them organize themselves, help them financially, provide them work, help them in other matters including domestic issues.
Government provides such groups loans at very low interests and provides help to market the products of SHG.


In your opinion, between barter system and monetary system, which one is superior and why?

  • Barter system:- A system in which goods and services are directly exchanged for other goods without the use of money is called barter system. In other words it is the direct exchange of goods for goods. Barter economy is such an economy in which there is no use of a generally acceptable medium of exchange. Before the emergence of money this system was in practice.
  • Monetary system:- It is the set of mechanisms by which a government provides money in a country's economy. it usually consists of a mint, central bank, and commercial banks.


Answer in two sentences:
What is a self-help group ?

A Self-Help Group refers to self-governed, peer controlled, informal group of people with a same socio-economic background and having a desire to collectively perform common purposes. The members of the group make small savings for a duration of time until they have enough capital in the group to start their own lending process. 


Define money. Explain the contingent functions of money.

Money is any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another. 
Functions of money:
(i) Act as a medium of exchange.
(ii) Act as a legal tender for repayment of debt.
(iii) As a standard of value.
(iv) As a unit of accounting measure.
(v) As a means to save or store purchasing power.


In your opinion between formal and informal credit, which one is superior and why?

  • Formal Credit Sector:- Formal financial institutions ignore small farmers, lower-income households, and small-scale enterprises in favour of a larger-scale, well-off , and literate clientele which can satisfy their stringent loan conditions.
  • Informal Credit Sector:- The informal financial sector provides savings and credit facilities for small farmers in rural areas, and for lower-income households and small-scale enterprises in urban areas.


How does the use of money make it easier to exchange things? Give an example.

Money overcomes the inefficiencies of the Barter system. Suppose a farmer who grows wheat wanted potatoes from another farmer who grows potatoes. There won't be any issue as long as the wheat growing farmer wants potatoes and the potato growing farmer wants wheat. Both items can be exchanged by the barter system. The problem would arise if the wheat growing farmer needs potatoes but the potato growing farmer needs tomatoes from a different farmer. The Barter system would not be useful in this case. To overcome this difficulty, money is used where money can be paid directly to buy what is needed without waiting for 'double coincidence of wants' to arise.


Explain "difficulty in storing wealth" problem faced in the barter system of exchange.

Individuals tend to store a part of their wealth or earnings as savings to be used for future needs or as an investment. However, it is very difficult to store many types of commodities. For example, perishable goods such as grains, milk, meat, etc could not be stored to exchange goods in future. In addition to this, transportation of goods from one place to another was tedious and also difficult. Therefore, the transfer of value and wealth storage was one of the major difficulties in the Barter system. 


Give the definitions of money.

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. The various functions performed by money are 

1. Common medium of exchange 

2. Store of value

3. Common measure unit 

4. Serve as the standard of deferred payments 



Given Reasons.
In Barter System there is direct exchange of goods.

Barter system was a system of exchange where goods were exchanged for goods and there was no common medium of exchange in the economy. Under this system, people exchanged commodities for commodities to satisfy their wants. Like a person who had 1 kg of rice and wanted 1 kg of wheat could exchange the rice with another person who had 1 kg of wheat and wanted 1 kg of rice instead. 



What do you mean by money?

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment. Any item or verifiable record that fulfils these functions can be considered as money.



What are the difficulties that were faced under Barter System?

The five main difficulties found in barter system are as follows:

1. Double Coincidence of Wants - Owning to lack of generally acceptable medium of exchange, a difficult problem of double coincidence of wants was faced by the persons who wanted to sell and buy goods. For exchange of goods persons desiring to exchange goods must specifically want those goods what others offers in exchange. Thus, an individual who wants to have a good he must locate another person who offers to give up the good wanted by him and who is willing to accept in ex­change the good offered by him.

2. Lack of a Standard Unit of Account - A barter economy lacked not only a common medium of exchange but also a standard unit of account in which prices could be measured and quoted. In the absence of a common unit of account, the number of exchange ratios (that is, prices of goods ex­pressed in terms of each other) between goods would be very large.

3. Impossibility of Subdivision of Goods - Another problem faced under the barter system for exchange of goods was impossibility of subdivision of goods without loss of their value. For instance, if a person has a cow and wants to have 5 kg of wheat, obviously, it is too costly to give one cow for 5 kg of wheat he requires.

4. Lack of Information - Another problem found in the barter system was that in it traders re­quired a good deal of information for exchange of goods. For example, if Amit wants to have a saw in exchange of a wooden table which he has made.

Not only should Amit be able to assess the value of saw but the maker of a saw should also be able to determine the value of the wooden table which Amit wishes to exchange. All this required a lot of information about goods for which people must spend a good deal of time and resources to obtain such information.

5. Production of Large and Very Costly Goods not Feasible - Another problem of barter economy relates to the production of large, costly goods. Suppose an individual who has technical skill and equipment to manufacture a car will not have much incentive to manufacture it in the barter economy.

This is because he can exchange a car with a person who has enough goods having a value equal to a car so that their exchange with a car can take place. The car maker must obtain food, clothing and several other commodities of day-to-day consumption in exchange for a car. It will be very difficult, almost impossible to find a prospective buyer who has enough of these goods and services to give in return for a car.



Given Reasons.
Barter System has many difficulties.

The various difficulties faced under the barter system of exchange.

1. Lack of Double Coincidence of Wants and Exchange: Double coincidence of wants means the simultaneous fulfillment of mutual wants by buyers and sellers. When 2 persons needs goods that are in each other’s possession .There is no guarantee that such double coincidence of want will exists. For Ex., Suppose a person possesses rice and wants to exchange it for a sugar. In the barter system he has to find out a person who not only has sugar but also wants rice

2. Lack of Common Measure of Value Even if the two people who want each other’s goods meet by coincidence, the problem arises in deciding the proportion in which the goods should be exchanged. There being no common measure of value, the rate of exchange will be arbitrarily fixed according to the intensity of demand for each other’s goods. One party is at a disadvantage in the terms of trade between the two goods.

3. Lack of Divisibility: In the absence of a common medium of exchange, a problem arises when a big indivisible commodity is to be exchange for a smaller commodity. For example, if the price of a horse is equal to five sheep, then a person having one sheep cannot exchange it for the horse because it is not possible to divide the horse into small pieces

4. Problem of Storing Wealth: The value of stored commodities may change in the due course of time. These goods may perish after some time. Secondly, it is very expensive to store specific goods for a long time. Finally the wealth stored in the form of specific goods may create jealousy and enmity among the neighbours or relatives.

5. Lack of Standard of Deferred (Future) Payments: Credit transactions requiring future payments cannot take place smoothly under barter trading. There are three main problems in this context. These are

 a. It may create controversy regarding the quality of goods or services to be repaid in future.

 b. The two parties may be unable to agree on the specific good to be used for repayment.

c. Both parties run the risk that the value of goods to be repaid may increase or decrease in future.



Distinguish between Legal Tender Money and Credit Money or Bank Money/Optional Money.

When general acceptability of any medium of exchange is enforced by law, the medium of exchange is called the legal tender money or fiat money. Ex. The rupee notes and coins are legal tender. No one can refuse to accept this money in exchange of goods and services.

Any deposit with commercial which can be withdrawn on demand is called demand deposit. Ex cheques. At present plastic money in form of debit cards and credit cards issued by different commercial banks also fall under this category. It is important to note that someone can refuse to accept such bank money in the form of cheques or credit cards.



Define or explain the following concept.
Barter System.

Barter system was a system of exchange where goods were exchanged for goods and there was no common medium of exchange in the economy. Under this system, people exchanged commodities for commodities to satisfy their wants. Like a person who had 1 kg of rice and wanted 1 kg of wheat could exchange the rice with another person who had 1 kg of wheat and wanted 1 kg of rice instead. 



Define or explain the following concept.
Money.

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. The various functions performed by money are 

1. As a medium of exchange, it refers to a function of money in which money is considered as a mode of exchanging goods. This function of money solved the main problem of barter system which was double coincidence of wants.

2. As a measure of value, it refers to a function of money that helps in determining the value of goods and services. Money is taken as the common denominator while measuring the value of goods and services in monetary terms.

3. As a store of value, it refers to the function of money  that helps individuals in storing their wealth in the form of money. Therefore, money acts as an asset that sustains value over a period of time.

4. As a standard of deferred payment, it refers to one of the most important functions of money. Deferred payments refer to payments made on loans, salaries, pensions, insurance premium, interests, and rents. The necessary condition for deferred payment is that the amount of repaid money should be the same as it was at the time of purchase of the good. Since all the goods and services can be expressed in terms of money, it makes the future payments easy and functional. 



Define or explain the following concept.
Near Money.

Near money, also known as quasi-money, refers to highly liquid assets that can rapidly be converted into cash such as short-term money market instruments and bank deposits. Near money is similar to cash equivalents. Near money means non-cash assets that are very liquid but cannot be used directly for transactions. Some examples of near money are: Draft, Bills of exchange,bonds, equity shares etc. 



Give Reasons or Explain the following:
Clearing house system economies the use of cash. 

A clearing house system is a system that facilitates exchange or clearance of payments, securities, or derivatives transaction between two clearing firms who are also known as member firms in order to bring efficiency in the use of cash by adjusting cash transaction between these parties. 


Give Reasons or Explain the following:
Margin requirement determines the value of loan.

Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. Therefore, margin requirement determines the value of loan. If the margin requirement is high, then the value of the loan will be low whereas if the margin requirement is low, then the value of the loan will be high. 


What is multiple credit creation? Explain it with its example. 

The main source of funds for commercial banks, is the deposits from the public. Loans that are given to borrowers are also maintained as deposits in his/her name. Every loan crates a deposit. This creation of a derivative deposit means the creation of credit. Given a certain amount of cash, a bank can create multiple times credit. In the process of multiple credit creation, the total amount of derivative deposits that a bank creates is a multiple of the initial cash reserves.

The banking system has many banks in it and it cannot grant loans in excess of the cash it creates. When a bank creates a derivative deposit, it loses cash to other banks.

The loss of deposit of one bank is the gain of deposit for some other bank. This transfer of cash within the banking system creates primary deposits and increases the possibility for further creation of derivative deposits. 

This is shown in the image.


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Distinguish between the following:
Quantitative and Qualitative Credit Control Measures.

Quantitative Methods of monetary policy includes those instruments which focus on the overall supply of the money. It includes :-

A. Two Policy Rates: 

Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 

Repo rate is the rate charged on the secured loans offered by the Central bank to the commercial banks that includes collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 

B. Two Policy Ratio:

Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on daily basis as a percentage of their total deposits. SLR is determined by the central bank and is a legal requirement to be fulfilled by the commercial banks.  It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 

Cash Reserves Ratio (CRR) refers to the proportion  of total deposits of the commercial banks which they must have keep as cash reserves with the central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.

C. Open Market Operations: 

Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money in the economy. By selling the securities, the central bank soaks liquidity from the economy and by buying the securities, the central bank releases liquidity. 

 

Qualitative Methods of monetary policy includes those instruments which focus on the selected sectors of the economy. It includes: 

A. Margin Requirement:

Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stablise the economy from inflation or deflation.

B. Rationing of Credit:

Rationing of credit refers to fixation of credit quotas for different business activities which is introduced when the flow of credit is to be checked particularly for speculative activities in the economy. 

C. Moral Suasion: 

The central bank makes the member bank agree through persuasion or pressure to follow its directives which is generally not ignored by the member banks. The banks are advised to restrict the flow of credit during inflation and be liberal in lending during deflation. 



Write Short Notes on Credit or Bank Money.

Any future monetary claim against an individual that can be used to buy goods and services is known as Credit money or bank money. There are many forms of credit money, such as bonds, money market accounts etc. Any form of financial instrument that matures after a certain period of time or cannot be repaid immediately is considered as credit money.   Cheques or Bank money are superior to other forms of money in that they are convenient for mailing, for paying exact sums, for providing receipts in the form of counterfoils and on account of being safe against being stolen or misplaced. Therefore, the bank money has become quantitatively the most important in all economic systems. In modern times, bank money has superseded all types of money.



Answer the following question.
What are the difficulties faced by people under Barter System?

Barter system was a system of exchange where goods were exchanged for goods and there was no common medium of exchange in the economy. Barter system had many difficulties which were faced by the people like lack of double coincidence of wants, lack of a common unit of value, difficulty of future payments or contractual payments and difficulty of storage of value and transfer of value. 



State with reasons whether you agree or disagree with the following statements.
Barter System did not have any difficulty.

No, I do not agree with this statement.
Barter system had the following difficulties:
1. Lack of Double Coincidence of Wants:
For exchange of goods persons desiring to exchange goods must specifically want those goods what others offers in exchange. Thus, an individual who wants to have a good he must locate another person who offers to give up the good wanted by him and who is willing to accept in exchange the good offered by him. A good deal of time was spent by a person in searching for a man with whom wants coincided.

2. Lack of Standard Unit of Account:
A barter economy lacked not only a common medium of exchange but also a standard unit of account in which prices could be measured and quoted. In the absence of a common unit of account, the number of exchange ratios (that is, prices of goods expressed in terms of each other) between goods would be very large. For example, two cows for one horse, one cow for two quintals of wheat and so on.

3. Indivisibility of goods:
For instance, if a person has a cow and wants to have 5 kg of wheat, obviously, it is too costly to give one cow for 5 kg of wheat he requires. Then, to do this transaction cow has to be divided. But cow cannot be divided or cut into pieces because cow will lose much of its value if it is divided.




Distinguish between Legal Tender Money and Credit Money or Bank Money.

1. Legal tender money refers to that money which is issued by the central bank on the order or authority of the government whereas credit money refers to that money whose value of money (face-value) is greater than the commodity value (intrinsic value) of money. 

2. Legal tender money includes all notes and coins which the people in a country are legally bound to accept as a medium of exchange whereas credit money includes all such forms of money which the people of a country generally accept as a medium of exchange. 

3. Legal tender money is a narrow concept as it includes only the notes and coins issued by the central bank whereas credit money is a broad concept as it includes the legal tender money as well as promissory notes, bank draft etc. 




Distinguish between
Cash Credits and Overdraft Facility.

b'The difference between cash credits and overdraft facility is as follow: 

1. A Cash Credit (CC) is a short-term source of financing for a company which enables a company to withdraw money from a bank account without keeping a credit balance in it but only after providing the required security as collateral whereas Overdraft refers to a continuous withdrawing facility in which the bank allows the customer to withdraw amount more than what he holds to his credit, but only up to a certain extent. 

2. For availing cash credit facility, the borrower must have a cash credit account with the bank or financial institution whereas to avail overdraft facility, the borrower must have a current account with the bank.

3. Cash credit facility is given against the pledge of inventory or other current assets or collateral security of the company whereas Overdraft facility is given against the security of fixed assets.

4. The Cash Credit is divided into two categories, i.e. Key Cash Credit and Open Cash Credit whereas the Overdraft is divided into two types, i.e. secured overdraft and clean overdraft.
'


Answer the following question.
Explain different types of loans and advances provided by commercial banks?

There are mainly two types of loans and advances provided by commercial banks: 
1. Unsecured loans : These loans does not require any collateral in the form of security. It includes:
(a) Call loans: Call loans refers to loans that the lender can demand to be repaid at any time and does not require monthly or quarterly payments. The rate of interest in case of call money is known as call loan rate which is the lowest among all other loans. 
(b) Short term loans: Short term loans refers to loans that runs for 1 to 12 months and does not requires monthly or quarterly payments.The rate of interest charged on short term loans is more than what is charged in call money. 
(c) Medium term loans: Medium term loans refers to loans that runs for one to 3 years and requires monthly or quarterly payments.The rate of interest charged on medium term loans is more than what is charged in short term loans. 
2.  Secured loans: These loans require collateral in the form of security to raise it. It includes long term loans which refers to loans that runs for 3 to 25 years which needs some collateral and requires monthly or quarterly payments.The rate of interest charged on long term loans is the highest in comparison to any other type of loan.


Answer in detail.
What are the qualitative measures of credit control?

Qualitative Methods of credit control refers to the monetary policy by the central bank which includes those instruments that focus on the selected sectors of the economy to control and regulate the money supply in these sectors. The various measures under qualitative credit control are: 

A. Margin Requirement:

Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation.

B. Rationing of Credit:

Rationing of credit refers to fixation of credit quotas for different business activities which is introduced when the flow of credit is to be checked particularly for speculative activities in the economy. 


C. Moral Suasion: 

Moral suasion refers to the persuasion and pressure which central bank exert on the member banks in order to follow its directives. These are generally not ignored by the member banks as it comes directly from the upper authority. The banks are advised to restrict the flow of credit during inflation and be liberal in lending during deflation.



Write Short Notes on.
Long term loans.

Long term loans refers to loans that runs for 3 to 25 years which needs some collateral and requires monthly or quarterly payments.The rate of interest charged on long term loans is the highest in comparison to any other type of loan. Long terms loans are offered to all types of firms and public.


Answer the following questions.
What are the various measures of Qualitative Credit Control?

Qualitative Methods of credit control refers to the monetary policy by the central bank which includes those instruments that focus on the selected sectors of the economy to control and regulate the money supply. The various measures under qualitative credit control are: 

A. Margin Requirement:

Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation.

B. Rationing of Credit:

Rationing of credit refers to fixation of credit quotas for different business activities which is introduced when the flow of credit is to be checked particularly for speculative activities in the economy. 


C. Moral Suasion: 

Moral suasion refers to the persuasion and pressure which central bank exert on the member banks in order to follow its directives. These are generally not ignored by the member banks as it comes directly from the upper authority. The banks are advised to restrict the flow of credit during inflation and be liberal in lending during deflation. 



Write Short Notes on.
Types of loans.

There are mainly two types of loans offered by commercial banks: 
1. Unsecured loans : These loans does not require any collateral in the form of security. It includes:
(a) Call loans: Call loans refers to loans that the lender can demand to be repaid at any time and does not require monthly or quarterly payments. The rate of interest in case of call money is known as call loan rate which is the lowest among all other loans. 
(b) Short term loans: Short term loans refers to loans that runs for 1 to 12 months and does not requires monthly or quarterly payments.The rate of interest charged on short term loans is more than what is charged in call money. Short terms loans are generally offered for working capital finance.
(c) Medium term loans: Medium term loans refers to loans that runs for one to 3 years and requires monthly or quarterly payments.The rate of interest charged on medium term loans is more than what is charged in short term loans. Medium terms loans are offered to all types of firms and public.
2.  Secured loans: These loans require collateral in the form of security to raise it. It includes long term loans which refers to loans that runs for 3 to 25 years which needs some collateral and requires monthly or quarterly payments.The rate of interest charged on long term loans is the highest in comparison to any other type of loan. Long terms loans are offered to all types of firms and public.


Define or explain the following concepts.
Cash credit.

A Cash Credit (CC) is a short-term source of financing for a company which enables a company to withdraw money from a bank account without keeping a credit balance in it but only after providing the required security as collateral. In order to avail the cash credit facility, the borrower must have a cash credit account with the bank or financial institution and the borrower also have to pledge the inventory or other current assets or collateral security of the company to avail such credits. 


Answer the following questions.
What are the various measures of Quantitative Credit Control?

Quantitative Methods of credit control refers to the monetary policy of central bank which includes those instruments that focus on the overall supply of the money. The various measures under quantitative credit control are:

A. Two Policy Rates: 

Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 

Repo rate is the rate charged on the secured loans offered by the Central bank to the commercial banks that includes collateral. It is increased at the time of inflation to reduce the  money supply in the economy and vice versa. \


B. Two Policy Ratio:

Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on daily basis as a percentage of their total deposits. SLR is determined by the central bank and is a legal requirement to be fulfilled by the commercial banks.  It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 

Cash Reserves Ratio (CRR) refers to the proportion  of total deposits of the commercial banks which they must have keep as cash reserves with the central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.


C. Open Market Operations: 

Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money. 


Do you agree with the following statement? Why?
"Standard coins are token coins."

Standard coins and token coins are different, and they can be distinguished on the following points:
Standard coinToken Coins
(a) Full-body coins are those whose face value and intrinsic value are the same.(a) Token coins are those whose face value is much more than their real and intrinsic value.
(b) They are made of precious costly metals.(b) They were made of cheap inferior metal like nickel, copper.
(c) Full-bodied coins are treated as unlimited legal tender. They can be used for making big payment to an unlimited extent.(c) They are used for making small payments. It is limited legal tender money.
(d) Indian rupee before $$1983$$ was standard coins made out of silver.(d) Metallic coins like $$50$$ paise, $$Rs. 1, Rs. 2, Rs. 5$$ and $$Rs.10$$ coins are token coins in India.


General acceptability is the only quality of good money.

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. The quality of a good money is that it is accepted by all the civilians of that country. Therefore, it is very important that the money in an economy is usually good money and has a general acceptability. 



Give any two examples of informal sector of credit.

Two examples of informal credit are:
1. Moneylender
2. Friend or relative


Why is cheap and affordable credit important for the country's development? Explain any three reasons.

Cheap and affordable credit is crucial for the country's development due to the following factors: 
  • More lending would lead to higher incomes and encourage people to invest in agriculture, engage in business and set up small scale industries. 
  • Cheap credit means more income would be left with the borrower to reinvest rather than return as interest. This leads to acceleration of economic activity.
  • Cheap credit would also allow weaker sections of society to enter formal sector of lending and rid them of exploitation at the hands of informal moneylenders. Thus, it may improve the economic condition of the poor and landless.


What is a barter system? What are its drawbacks?

Barter System is a system of exchange in which one commodity is exchanged for another commodity. 

Drawbacks of Barter Systems:
1. Lack of double coincidence of wants.
2. Lack of a common measure of value.
3. Indivisibility of certain goods.
4. Difficulty in making deferred payments.
5. Difficulty in storing value.






State the limitations of barter exchange.

Barter system was a system of exchange where goods were exchanged for goods and there was no common medium of exchange in the economy. Barter system had many drawbacks like lack of double coincidence of wants, lack of a common unit of value, difficulty of future payments or contractual payments and difficulty of storage of value and transfer of value. 



What are the basic characteristics of money?

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. The various characteristics of money are 

1. Common medium of exchange 

2. Store of value

3. Common measure unit 

4. Serve as the standard of deferred payments 

6. It is in both tangible as well as intangible form



State with reasons, whether you 'agree' or 'disagree' with the following statement:
Barter system had many difficulties.

Barter system was a system of exchange where goods were exchanged for goods and there was no common medium of exchange in the economy. Barter system had many drawbacks like lack of double coincidence of wants, lack of a common unit of value, difficulty of future payments or contractual payments and difficulty of storage of value and transfer of value. 


What are the main functions of money? How does money overcome the shortcomings of a barter system?

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. The various functions performed by money are 
1. Common medium of exchange 
2. Store of value
3. Common measure unit 
4. Serve as the standard of deferred payments 
In barter system, there is lots of drawbacks which includes  double coincidence of wants, lack of a common unit of value, difficulty of future payments or contractual payments and difficulty of storage of value and transfer of value which are resolved by the functions of money.


Explain the following term: Token money

Token money is also money whose face value exceeds its cost of production, i.e. the intrinsic value is lower than the extrinsic value. This means that the actual worth of a note or coin is much less than what we use it for.


Explain the reason for necessity of supervision by the Reserve Bank of India of formal sources of loans.

The RBI monitors that the banks actually maintain the cash balance. The RBI sees the the banks give loan not just to profit - making business and traders but also to small cultivators, small-scale industries, small borrowers, etc. Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.


What are time deposits?

A time deposit is an interest-bearing bank deposit account that has a specified date of maturity, such as a certificate of deposits (CD). The deposited funds must remain in the account for the fixed term to receive the stated interest rate. Time deposits are an alternative to the standard savings account, and will usually pay a higher rate of interest.


"Money acts as an intermediate in the exchange process". Explain.

Money is the modern form of currency that is accepted as the medium of exchange and is a measure of value.
In a Barter system, where goods are directly exchanged without the use of money, double coincidence of wants is essential. By serving as a medium of exchange, money removes the difficulties associated with the Barter system. Money is authorised by the government of the country and nobody can legally refuse it as a medium of exchange for goods or services. Thus, it can be concluded that money acts as an intermediate in the exchange process.


Seema wants to open a small flower shop near the village temple for which she needsBriefly explain which is the best credit source for her and why?

The best credit source for Seema is to go to SHGs. The reasons are as follows
(i) The Self Help Groups are organisations of the rural poor people specially women. They provide small loans on reasonable rates.
(ii)  SHGs do not require collateral and documentation.
(iii) SHGs also take up social issues related women so if Seema becomes a member of SHGs then she will not only get financial assistance but also support of other women members.


Why do lenders ask for collateral while lending? Explain.

Collateral is an asset that the borrower owns (such as land, building, vehicle, livestocks,deposits, etc). It is asked by Lender for following purpose :- 

  1. As a guarantee to a lender until the loan is repaid. 

  2. In case of Default i.e. unable to pay a loan, the lender can sell it or use it. 



Krishna is working in neighboring field with very less wages. Expenses on sudden illnesses or functions in the family are also met through loans. The landowner charges an interest rate of $$5$$ percent per month. At present she owes the landowner $$ 5,000$$.
Analyse the credit arrangements given above. 

Krishna relies on Informal source of credit (Private Moneylender).



Why Self Help Groups are growing in popularity?

Self Help Groups are local groups of rural poor constituting 15-20 members. The members pool their saving and take loans at nominal rates of interest. The members of the SHGs do not require collateral to get loans. If they are regular in savings then the group becomes eligible for taking loans from banks. This creates self employment opportunities for the members. Because of these  advantageous features, the SHGs are growing in popularity. 


What do you understand by the term 'near money' ?

Near money, also known as quasi-money, refers to highly liquid assets that can rapidly be converted into cash such as short-term money market instruments and bank deposits. Near money is similar to cash equivalents. Near money means non-cash assets that are very liquid but cannot be used directly for transactions. Some examples of near money are: Draft, Bills of exchange,bonds, equity shares etc.


Differentiate between formal and informal credit.

Formal credit sector:
  • Formal credit sector provides loan to higher income and large-scale business groups with required documents and collateral.
  • It has complex procedures. Reading and writing skills are required to create a file on transaction details.
  • It carries a low interest rate.
  • The availability of loanable amount is regular.
  • Transaction costs are high.

Informal credit sector:

  • Informal credit sector provides loan to small farmers in rural areas and for lower income groups and small scale enterprises in urban areas. Availing credit facility is very simple; non-bureaucratic and few written documents. Literacy is not a requisite. 
  • It carries a very high rate of interest. 
  • The volume and availability of loanable amount are subject to seasonal fluctuations.
  • Transaction costs are low.


From where do the small farmers get capital for farming? How does it affect the farmers?

Most small farmers borrow money for the requirement of capital. They borrow money from large farmers or traders that they supply various raw materials for cultivation of land or moneylenders within the village. These moneylenders charge a high rate of interest on the amount borrowed.


State any three reasons which define the need of formal sources of credit in India.

Following are the reasons which define the need of formal sources of  credit in India:

  1. Formal sources of credit in India need to be expanded for the development of the nation. Cheap and affordable credit is a necessity for the development of the nation.
  2. To make sure that the poor can benefit from the cheaper loans, it is important that the formal credit is distributed more equally.
  3. Usually the poor have to depend on informal sources of credit and it is the richer households who receive formal credit.


State with reasons, whether you 'agree' or 'disagree' with the following statements. 
The barter system had many difficulties.

I agree with the above statement.

The following are the main difficulties which were found in the barter system:

  1. Double Coincidence of Wants: Owning to lack of generally acceptable medium of exchange, a difficult problem of double coincidence of wants was faced by the persons who wanted to sell and buy goods.
  2. Lack of a Standard Unit of Account: A barter economy lacked not only a common medium of exchange but also a standard unit of account in which prices could be measured and quoted.
  3. Impossibility of Subdivision of Goods: Another problem faced under the barter system for exchange of goods was impossibility of subdivision of goods without loss of their value. For instance, if a person has a cow and wants to have 5 kg of wheat, obviously, it is too costly to give one cow for 5 kg of wheat he requires.
  4. Lack of Information: Another problem found in the barter system was that in it traders required a good deal of information for exchange of goods. For example, if Amit wants to have a saw in exchange of a wooden table which he has made.


''Households still depend on informal sources of credit". Support the statement with examples.

Poor households still depend on informal sources of credit because:
  1. Bank loans require proper documentation and collateral which is rarely available with poor households.
  2. Informal sources of credit such as moneylenders know the borrowers personally and are often willing to give a loan without a collateral.
  3. Banks are not present everywhere in rural India, whereas informal sources are easily available in all villages.
  4. Formal sources provide loan only for productive purposes, whereas the informal sources provide credit for productive and non-productive purposes.
  5. Other informal sources of credit are friends and relatives, or traders and landlords, who know the borrowers personally and therefore do not demand collateral.


Describe any three advantages of SHGs for the poor.

Following are the three advantages of Self Help Groups (SHGs):

  1. Members can take loans from the group’s savings themselves on a decided rate of interest. The rate of interest is much lower than the interest that is charged by the informal sources.
  2. After two years of regular savings, the SHG can also take a loan from the bank. Loan is given on the name of the group and creates tremendous opportunities for self-employment of the members.
  3. Due to SHG, the poor members are able to avail loan even in the absence of collateral.



In situations with high risks, credit might create further problems for the borrower. Explain.

Money borrowed on higher rates of interest will usually increase the debt burden or debt trap.
Debt trap is a situation where the debtor will not be able to repay the debt incurred.
Informal sources of credit charge higher rates of interest.
For example : Small farmers taking loan from money lenders at higher rates of interest for farming purposes and not able to pay back will result in selling a portion of farmers' land and paying back to the money lender.


Differentiate between limited legal tender and unlimited legal tender.

1:Limited legal tender money is the money that can be accepted only up to a certain maximum limit. for e.g. In India, one paise coin to 25 paise coin is legal tender up to Rs 25. One can refuse payments in these small coins beyond the sum of Rs 25.
2:Unlimited legal tender money is the money that a person has to accept without any limit of amount. For example, all currency notes and coins of 50 paise are unlimited legal tender money.


Compare the contribution of formal and informal credit between urban poor and rich households. Give any two suggestions to increase the role of formal sector in credit creation.

Sources of agricultural credit can be broadly classified into institutional and non-institutional sources. Non-Institutional sources include moneylenders, traders and commission agents, relatives and landlords, but institutional sources include co-operatives, commercial banks including the SBI Group, RBI and NABARD.

The short term and medium term loan requirements of Indian  are mostly met by moneylenders, co-operative credit societies and Government. But the long-term loan requirements of the  are also met by moneylenders, land development banks and the Government.
Two suggestions to increase the role of formal sector in credit creation.
 1) Adequate number of branches should be open in rural & backward areas.
 2)The procedure to get the loan is time consuming. It should be reduced



Distinguish between limited legal tender and unlimited legal tender.

Limited Legal TenderUnlimited Legal Tender
The coins of smaller denominations are considered as limited legal tenders (say $$1/2/5$$ rupee coins) because they are acceptable only for meeting financial transactions of lower value (say meeting your short distance bus/auto fare)The rupee notes of higher denominations (say $$100/500/1000$$ rupee notes) are considered as unlimited legal tenders because they can be used settling claims relating to high value transactions.



Why is modern currency accepted as a medium of exchange without any use of its own ? Find out the reason.

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) The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India. 
5) No individual in India can legally refuse a payment made in Rupees.


How do demand deposits have the essential features of money? Explain.

Demand deposits share the essential features of money in following way :- 

  1. The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash. 

  2. Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.




Analyse the role of credit for development.

  • Credit plays a vital role in economic growth and development.
  • Credit availability at cheaper rates of interest encourages the business or firms to borrow more.
  • Borrowing more money will facilitate the growth of business or increase in production in the economy.
  • So, credit supply is the key factor for economic development.


Class 10 Economics Extra Questions