St.

Mary’s School, Academic Year 2021-22

Class X Social Science Answer Key

ECONOMICS L-3 MONEY AND CREDIT

NCERT QUESTIONS:

1. In situations with high risks, credit might create further

problems for the borrower. Explain.
Ans. It is true that in situations with high risks, credit might
create further problems for the borrower. Credit helps
the people to increase their earnings but in some
situations, it pushes the people into debt-trap. If people
are not able to repay the loan, they have to sell their
assets or land.
For example, in rural areas, the main demand for credit
is for crop production which involves considerable cost
on seeds, fertilisers, pesticides, etc. Farmers take such
crop loans at the very beginning of the season and repay
the loan after harvest.
Loans repayment is fully dependent on the income
from the farming. But crop failure makes it impossible
to repay their loan. As a result, farmers often have to sell
a piece of their land to repay the loan. Credit (loan) here
plays a negative role and lowers down the financial
position of the farmers. It pushes them in a state from
which recovery of loan is very painful.

2. How does money solve the problem of double

coincidence of wants? Explain with an example of your
own.
Ans. In barter system, where goods are directly exchanged
without the use of money, 'double coincidence of wants’
(i.e. a person desires to sell exactly what the other person
wishes to buy) is an essential feature. But it, indeed, is a
very cumbersome process.
By serving as a medium of exchange, money removes
the need for double coincidence of wants and the
difficulties associated with the barter system.
For example, it is no longer necessary for a shoe
manufacturer to look for a farmer who will but his shoes
and at the same time sell him wheat. All he has to do is
find a buyer for his shoes, who will exchange his money
for shoes. Now, he can purchase wheat or any other good
in the market with the help of the money earned. Thus,
the problem of double coincidence of wants get solved.

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Class X Social Science Answer Key

3. How do banks mediate between those who have surplus

money and those who need money?
Ans. Usually two types of people come to bank, one, those who
have surplus money and two, those who need money.
People with surplus money deposit their money in the
bank. Banks keep small portion (15%) of such deposits
as cash for themselves to pay the depositors on demand.
The rest of the deposited money is used to extend loans
to those who need money. The banks offer interest to
those people who deposit their surplus money with them
and charge an interest from those who take loan from
them. In this way, banks mediate between those who
have surplus money and those who need money.

4. Look at a 10-rupee note. What is written on top? Can you

explain this statement"
Ans. On a ten-rupee note, matter written on the top is
guaranteed by the Central Government'. It means that
the ten rupee note can be used as a medium of exchange
because it is authorised by the government of the country.
It cannot be refused in payment for transactions.
Everybody is bound to accept it in exchange for goods
and services and also in discharge of debts. No one can
refuse to accept it, because its non-acceptance is an
offence.

5. Why do we need to expand formal sources of credit in

India?
Ans. We need to expand formal sources of credit in India
because:
• These sources offer cheap loans, which results in higher
incomes and higher profits and help in the expansion of
business.
• These sources of loans are under the supervision of a
centralized agency, i.e., Reserve Bank of India.
• In the rural areas where people have to rely on informal
sources, this can help farmers to take up agricultural and
non-agricultural activities, small-scale industries etc.
• Credit can be distributed more equally, benefitting the
poor with the help of cheaper loans.

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

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Class X Social Science Answer Key

Ans. The basic idea behind the SHGs is to provide a financial

resource for the poor through organizing the rural poor
especially women, into small "Self- Help Groups'. They
also provide timely loans at a reasonable interest rate
without collateral. Thus, the main objectives of the
SHGs are:
• to organize rural poor especially women into small
Self-Help Groups.
• to collect savings of their members
• to provide loans without collateral.
• to provide timely loans for a variety of purposes.
• to provide loans at a reasonable rate of interest and
easy terms.
• to provide platform to discuss and act on a variety of
social issues such as education, health, nutrition.
domestic violence etc.

7. What are the reasons why the banks might not be willing
to lend to certain borrowers?
Ans. The banks might not be willing to lend certain borrowers
because:
• Banks require proper documents and collateral as
security against loans. Some borrowers fail to meet these
requirements.
• Borrowers who have not repaid previous loans (i.e..
defaulters),the banks might not be willing to lend them
further.
• Banks might not be willing to lend those entrepreneurs
who are going invest in the business with high risks.
• One of the principle objectives of a bank is to earn more
profits after meeting a number of expenses. For this
purpose, it has to adopt judicious lending and
investment policies, which ensure fair and stable return
on the funds.

8. In what ways does the Reserve Bank of India supervise

the functioning of banks? Why is this necessary?
Ans. The Reserve Bank of India is the apex bank of the country,
supervising the functioning of formal sources of credit as:
• It monitors that the banks maintain the required cash
balance with them.

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Class X Social Science Answer Key

• It supervises that the banks give loans not just to profit-

making businesses and trade but also t small cultivators,
small-scale
• lt is industries, small borrowers etc. mandatory for the
banks to submit information to RBI periodically on how
much they lending are at what interest rate and to whom.

9. Analyse the role of credit for development.

Ans. Development is sustained by a proper credit policy.
By giving loans to industries and trade, banks provide
them with the necessary funds for carrying on their
business without problems. This results in increased
production and services, more employment and profits.
Caution is required by the lenders when high risks are
expected, so that there are no losses. Credit from the
formal sector needs to be increased, as loans from the
informal sector which have very high interest rates, do
more harm than good. For this reason, it is important
that the formal sector gives out more loans so that
borrowers are not exploited by informal sector
moneylenders and the results will definitely contribute
to national development.

10. 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.
Ans. Manav will decide whether to borrow from the bank or
the moneylender on the basis of the following terms of
credit:
(a) Rate of interest
(b) Availability of collateral and documentation required
(c) Mode of repayments
Depending on these factors and of course, easier terms
of repayment, Manav will decide whether to borrow
from the bank or the moneylender.

11. In India, about 80 per cent of farmers are small farmers,

who need credit for cultivation.
a) Why might banks be unwilling to lend to small
farmers?
b) What are the other sources from which the small
farmers can borrow?

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Class X Social Science Answer Key

c) Explain with an example how the terms of credit can

be unfavourable for the small farmer.
d) Suggest some ways by which small farmers can get
cheap credit.
Ans.
a) Bank loans require proper documents and collateral
as security against loans. But most of the times, small
farmers lack in providing such documents and
collateral. Besides, at times, they even fail to repay
the loan in time because of the uncertainty of the
crop. So, banks might be unwilling to lend to small
farmers.
b) The small farmers can borrow from informal sources
of credit like moneylenders, employers, relatives.
friends etc.
c) An example of unfavourable terms of credit for a
small farmer is Vinit. He borrows money at the rate
of 4% per month (i.e., 48% per annum) from a local
moneylender to grow his crop. But the crop fails due
to severe drought. As a result. Vinit has to sell a part
of his land to repay the loan. Now his condition
becomes worst then before.
d) Small farmers can get cheap credit through
cooperative societies and SHGs.

EXTRA QUESTION:

1. Define money.
Ans. Money is anything which has common acceptability as
a means of exchange, a measure and a store of value.
2. Why is money called 'a medium of exchange?
Or
How does money acts as a medium of exchange.
Ans. Money acts as an intermediary in the exchange process,
thus it is called a medium of exchange.
3. Why one cannot refuse a payment made in rupees in
India?
Ans. One cannot refuse a payment made in rupees in India
because it is authorised by the Indian government.
4. What is meant by double coincidence of wants?
Ans. Double coincidence of wants means owner of good X,
say shoes, to find someone else with good Y, say a bag
of wheat, and both being in need of each other's good.

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Class X Social Science Answer Key

5. What is the meaning of barter system?

Ans. A system where goods are directly exchanged, without
the use of money is called barter system.
6. What objects were used as money in India, before the
introduction of coins?
Ans. Food grains and cattle were used as money before the
introduction of coins in India.
7. Which metals were used for making coins in India in later
stages?
Ans. Gold, silver and copper coins were used for making coins
in later stages in India.
8. Give the modern forms of money.
Ans. The modern forms of money include currency-paper
notes and coins and plastic money.
9. The modern currency is accepted as a medium of
exchange. Why?
Ans. It is accepted as a medium of exchange because it is
authorised by the Government of India.
10. Define a bank.
Ans. A bank is a financial institution whose demand deposits
are widely accepted as money for making payments and
has the power to create money.
11. What are demand deposits?
Ans. Deposits in the bank accounts, which can be withdrawn
on demand are called demand deposits.
12. What is a cheque?
Ans. A cheque is an instrument instructing the bank to pay
a specific amount from the person's account to the person
in whose name the cheque has been issued.
13. What determines the main source of income for the
banks?
Ans. It is the difference between what is charged from the
borrowers and what is paid to the depositors or savers,
which determines the income of the banks.
14. Define credit.
Or
What do you understand by the term 'credit"?
Ans. Credit or loan refers to an agreement in which the lender
supplies the borrower with money, goods services in
return for the promise of future repayment.
15. For what purpose credit is mainly demanded in rural
areas?
Ans. Credit is mainly demanded for the purpose of crop

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Class X Social Science Answer Key

production in rural areas.

16. What is a debt-trap?
Ans. A debt-trap is a situation when it becomes impossible
to repay the loan and the borrower adds on a new debt
to pay the existing debt.
17. What is collateral?
Ans. Collateral is an asset, such as land, vehicle, building,
livestock and deposits with banks, that the borrower
owns and uses this as a guarantee to a lender until the
loan is repaid.
18. What are the main 'terms of credit'?
Ans. Interest rate, collateral, documentation requirements and
the mode of repayment together comprise terms of credit'.
19. Why are banks unwilling to lend loans to small farmers?
Ans. Banks provide loans after collateral and documentation
securities, which generally the small farmers fail to
comply with. Therefore, banks are unwilling to give
loans to small farmers.
20. What kind of credit is crucial for a country's
development?
Ans. Cheap and affordable credit plays a crucial role in a
country's development.
21. Besides banks, what are the other sources of credit from
which the small farmers borrow?
Ans. Besides banks, the small farmers borrow from landlords,
moneylenders, traders, relatives and friends etc.
22. What are SHGs?
Ans. They are Self-Help Groups formed by the poor rural
women.
23. Explain the meaning of 'terms of credit.
Ans. Interest rate collateral, documentation requirement and
the mode of repayment together comprise what is called
the "terms of credit. These terms vary substantially from
one credit arrangement to another. They may vary
depending on the nature of the lender and the borrow.
These are required to make the borrowers aware of the
conditions to be followed for taking the loan.
24. Explain why the supervision of the functioning of formal
sources of loans is necessary
Ans. The supervision of the functioning of formal sources of
loans is necessary to check
a) whether the banks actually maintain the cash balance.

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Class X Social Science Answer Key

b) whether the banks give loans not just to profit-making

businesses and traders but also to cultivators, small-scale
industries and small borrowers.
c) how much banks are lending, to whom and at what
interest rate.

25. Differentiate between formal sector credit and informal

sector credit. Or
Mention any three points of distinction between formal
sector loans and informal sector loans.
Ans. Formal Sector Credit
(a) This credit is provided by banks and cooperative
societies to the borrowers.
(b) The Reserve Bank of India (RBI) supervises the
functioning of formal sector loans. It periodically
checks the interest rate and other details of the
sources.
(c) Proper terms of credit like collateral, documentation
rate of interest and mode of payment are followed.
(d) They provide cheap and affordable credit with
common terms of credit for all.
(e) They charge less interest rates as compared to informal
sectors.

Informal Sector Credit

(a) This credit is provided by traders, moneylenders,
employers, relatives, friends, etc.
(b) There is no government or private organisation which
supervises the informal sector loans.
(c) Terms of credit are flexible for the personal benefit of
the lenders and pitiable condition of borrowers.
(d) They exploit the borrowers for their own benefits.
(e) Their rate of interest is much higher than that of
formal sector.

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