Ch. 3 Money and Credit
Q. What is the main source of credit for the rich households?
A. The main source of credit for the rich households is the formal sector of credit i.e. banks.
Q. Who issues currency notes on behalf of the central government?
A. The Reserve Bank Of India.
Q. Which medium has eliminated the need for double coincidence of wants and how?
A. Money has eliminated the need for double coincidence of wants as it acts as a universally accepted intermediate in the exchange process.
Q. Which source of credit tries to exploit the poor farmers by charging a high rate of interest?
A. Informal source of credit i.e. moneylenders, traders, employers etc.
Q. Who takes the decisions regarding savings and loans in SHG?
A. The members of the SHG take most of the decisions regarding savings and loans.
Q. How do the banks use the major portion of the deposits?
A. The banks use the major proportion of the deposits to give out loans to people.
Q. What is a cheque?
A. A cheque is a paper instructing the bank to pay a specific amount from the payer's account to the person in whose name the cheque has been issued.
Q. Define collateral?
A. Collateral 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. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment.
Q. What is an essential feature of barter system?
A. Double coincidence of wants is an essential feature of barter system.
Q. What is the major reason that prevents the poor from getting loans from the banks?
A. The absence of collateral is the major reason that prevents the people from getting loans from the bank.
Q. Define demand deposits.
A. A demand deposit is a money deposited by a person with a bank. It can be withdrawn by the person on demand i.e. as and when required and hence is called a 'demand deposit'.
Q. Why money is called a medium of exchange?
A. Money is accepted by everyone as a means of payment. It eliminates the need for the double coincidence of wants. Since money acts as a universally accepted intermediate in the exchange process, it is called a medium of exchange.
Q. How do banks mediate between those who have a surplus of and those who need money?
Q. How does money solve the problem of double coincidence of wants? Explain with examples.
OR
Why are transactions made in money? Explain with examples.
A. Transactions are made in money because it eliminates the need of double coincidence of wants. Money is universally accepted medium of exchange. It acts as an intermediate in the exchange process thus eliminating the need for double coincidence of wants.
e.g.・If a shoe manufacturer wants to sell shoes in the market and buy wheat, he will first exchange the shoes he has produced for money and then exchange the money for wheat.
・Without the use of money, it would have been difficult for him to exchange his shoes and get wheat. This is because then he would have to look for a wheat growing farmer who not only wants to sell the wheat also wants to buy the shoes i.e a double coincidence of wants would be required.
Q. What is the role played by banks in the economic development of a country?
A.・Banks mediate between those who have a surplus of money and those who are in need of money. The banks accept deposits made by people with extra cash and use a major proportion of these deposits to meet the loan requirements of the people.
・This way banks boost the economy as they provide credit for various kinds of economic activities like setting up of businesses
・The banks accept demand deposits to be able to give out loans. These demand deposits. These demand deposits are widely accepted as a means of payment, along with currency.
・The modern forms of money- deposits and currency are closely linked with the working of the modern banking system. But for the banks, there would be no demand deposits and no payments by cheques against these deposits.
・Banks are the biggest formal source of credit in any economy.
Q. Why is cheap and affordable credit important for the country‘s development?
OR
Why should banks and cooperative societies provide more loan facilities to the rural households in India?
A. ・If the cost of borrowing would be very high, a larger part of the borrower's earnings would be used to repay the loan. Hence, the borrowers have less income for themselves.
・In certain cases, the higher rate of interest for borrowing can mean that the amount to be repaid is greater than the income of the borrower.
・This could lead to increasing debt and debt trap. Also, people who might wish to start an enterprise by borrowing may not do so due to the high cost of borrowing.
・Thus the banks and cooperative societies need to lend more and at cheaper interest rates. This would lead to higher incomes and many people could then borrow cheaply for a variety of needs.
・People could set up for industries or trade in goods, thus playing a role in boosting the economy. Thus cheap and affordable credit is crucial for the country's development.
A. The main source of credit for the rich households is the formal sector of credit i.e. banks.
Q. Who issues currency notes on behalf of the central government?
A. The Reserve Bank Of India.
Q. Which medium has eliminated the need for double coincidence of wants and how?
A. Money has eliminated the need for double coincidence of wants as it acts as a universally accepted intermediate in the exchange process.
Q. Which source of credit tries to exploit the poor farmers by charging a high rate of interest?
A. Informal source of credit i.e. moneylenders, traders, employers etc.
Q. Who takes the decisions regarding savings and loans in SHG?
A. The members of the SHG take most of the decisions regarding savings and loans.
Q. How do the banks use the major portion of the deposits?
A. The banks use the major proportion of the deposits to give out loans to people.
Q. What is a cheque?
A. A cheque is a paper instructing the bank to pay a specific amount from the payer's account to the person in whose name the cheque has been issued.
Q. Define collateral?
A. Collateral 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. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment.
Q. What is an essential feature of barter system?
A. Double coincidence of wants is an essential feature of barter system.
Q. What is the major reason that prevents the poor from getting loans from the banks?
A. The absence of collateral is the major reason that prevents the people from getting loans from the bank.
Q. Define demand deposits.
A. A demand deposit is a money deposited by a person with a bank. It can be withdrawn by the person on demand i.e. as and when required and hence is called a 'demand deposit'.
Q. Why money is called a medium of exchange?
A. Money is accepted by everyone as a means of payment. It eliminates the need for the double coincidence of wants. Since money acts as a universally accepted intermediate in the exchange process, it is called a medium of exchange.
Q. How do banks mediate between those who have a surplus of and those who need money?
A.・Banks keep only a small proportion of their deposits as cash with themselves. Example, banks in India hold about 15 percent of their deposits as cash.
・This is kept as a provision to pay the depositors who might come to withdraw money from the bank on any given day. Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage with this cash.
・Banks use the major portion of the deposits to extend loans. In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).
・Banks charge a higher interest rate on loans than what they offer on deposits.
・The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
Q. What are the advantages of depositing money in the bank?
OR
What are the advantages of demand deposits?
OR
What are the advantages of demand deposits?
A. Advantages of depositing money in the bank are:
・Banks accept the deposits and also pay an amount as interest on the deposits.
・In this way, people’s money is safe with the banks and it earns an amount of interest.
・People also have the provision to withdraw the money as and when they require.
・Banks keep only a small proportion of their deposits as cash
・They use the major portion of the deposits to extend loans for various economic activities.
・This creates employment and income to the people of a nation and contributes to national development.
Q. Why do we need to expand formal sources of credit in India?
OR
Credit activities of the informal sectors should be discouraged. Support the statement with arguments.
OR
Credit activities of the informal sectors should be discouraged. Support the statement with arguments.
A. We need to expand formal sources of credit in India because:
・There is no organisation which supervises the credit activities of lenders in the informal sector. The formal sectors activities, on the other hand, are regulated by the Reserve Bank of India.
・The lenders of informal sector can lend at whatever interest rate they choose. There is no one to stop them from using unfair means to get their money back.
・Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans. This reduces the income of the borrowers and could lead to increasing debt and debt trap.
・Also people who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing.
・Thus, formal sources of credit should be expanded to reduce dependence on informal sources of credit.
・85% of poor households in India still depend on informal sector for credit. They should be able to avail loans from the formal sector at cheaper rates.
Q. What is the idea behind forming self-help groups? Explain their functions.
A. Self Help Groups (SHGs) main idea is to provide loans to the poor by organising rural poor especially women into small groups and pool their savings.
Functions of Self Help Groups are as follows:
・Give its members small loans from the group itself at cheap rates.
・They give loans free of any collateral and give timely loans for a variety of purposes.
・Act as the building blocks of organisation of the rural poor.
・Other than helping the poor, especially women, to become financially self-reliant the regular meetings of the SHG provide a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence etc.
Q. Mention any three points of distinction between formal and informal sector loans.
A.
Formal Sector Loans
|
Informal Sector Loans
|
Formal sector loans are provided by banks and cooperatives.
|
Informal loans are provided by moneylenders, traders, relatives, friends, employers etc.
|
The Reserve Bank of India supervises the functioning of formal sources of loans.
|
There is no organisation which supervises the credit activities of lenders of informal loans.
|
These are provided at a comparatively reasonable rate and do not lead to debt traps.
|
These are provided at much higher interest resulting in increasing debt for borrowers and debt trap.
|
Q. How does money solve the problem of double coincidence of wants? Explain with examples.
OR
Why are transactions made in money? Explain with examples.
A. Transactions are made in money because it eliminates the need of double coincidence of wants. Money is universally accepted medium of exchange. It acts as an intermediate in the exchange process thus eliminating the need for double coincidence of wants.
e.g.・If a shoe manufacturer wants to sell shoes in the market and buy wheat, he will first exchange the shoes he has produced for money and then exchange the money for wheat.
・Without the use of money, it would have been difficult for him to exchange his shoes and get wheat. This is because then he would have to look for a wheat growing farmer who not only wants to sell the wheat also wants to buy the shoes i.e a double coincidence of wants would be required.
Q. What is the role played by banks in the economic development of a country?
A.・Banks mediate between those who have a surplus of money and those who are in need of money. The banks accept deposits made by people with extra cash and use a major proportion of these deposits to meet the loan requirements of the people.
・This way banks boost the economy as they provide credit for various kinds of economic activities like setting up of businesses
・The banks accept demand deposits to be able to give out loans. These demand deposits. These demand deposits are widely accepted as a means of payment, along with currency.
・The modern forms of money- deposits and currency are closely linked with the working of the modern banking system. But for the banks, there would be no demand deposits and no payments by cheques against these deposits.
・Banks are the biggest formal source of credit in any economy.
Q. Why is cheap and affordable credit important for the country‘s development?
OR
Why should banks and cooperative societies provide more loan facilities to the rural households in India?
A. ・If the cost of borrowing would be very high, a larger part of the borrower's earnings would be used to repay the loan. Hence, the borrowers have less income for themselves.
・In certain cases, the higher rate of interest for borrowing can mean that the amount to be repaid is greater than the income of the borrower.
・This could lead to increasing debt and debt trap. Also, people who might wish to start an enterprise by borrowing may not do so due to the high cost of borrowing.
・Thus the banks and cooperative societies need to lend more and at cheaper interest rates. This would lead to higher incomes and many people could then borrow cheaply for a variety of needs.
・People could set up for industries or trade in goods, thus playing a role in boosting the economy. Thus cheap and affordable credit is crucial for the country's development.
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