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Money and Credit Class 10 Questions and Answers Economics Chapter 3
Make your learning experience enjoyable by preparing from the quick links available on this page. Use the Class 10 SST Economics Chapter 3 NCERT Solutions and get to know different concepts involved. All the Solutions are covered as per the latest syllabus guidelines. Knowing the NCERT Class 10 Economics Chapter 3 Questions and Answers helps students to attempt the exam with confidence.
Money and Credit NCERT Intext Questions and Answers
Let’s Work These Out (NCERT Textbook page 40)
How does the use of money make it easier to exchange things?
The use of money makes it easier to exchange things because it is accepted as a medium of exchange. It serves as a unit of value and solves the problem of double coincidence of wants.
Can you think of some examples of goods/services being exchanged or wages being paid through barter?
In rural areas usually foodgrains are exchanged for other crops in some cases. In urban areas, goods or services are not usually exchanged. Yes, in some government schemes, labourers are paid not in cash but in kind, for example, 7 kg of wheat for a day’s work.
Let’s Work These Out (NCERT Textbook page 42)
M. Salim wants to withdraw ₹ 20,000 in cash for making payments. How would he write a cheque to withdraw
Tick the correct answer.
After the transaction between Salim and Prem,
(i) Salim’s balance in his bank account increases, and Prem’s balance increases.
(ii) Salim’s balance in his bank account decreases and Prem’s balance increases.
(iii) Salim’s balance in his bank account increases and Prem’s balance decreases.
(ii) Salim’s balance in his bank account decreases and Prem’s balance increases.
Why are demand deposits considered as money?
Demand deposits are considered as money because they can be withdrawn when required and the money withdrawn can be used for making payments.
Let’s Work These Out (NCERT Textbook page 44)
Fill the following table.
|Why did they need credit?||To meet the working capital needs||To meet the expenses of cultivation|
|What was the risk?||No risk||Risk of crop failure|
|What was the outcome?||Made a good profit and repaid the loans||Caught in debt. Had to sell a part of land to pay off the debt.|
Supposing Salim continues to get orders from traders. What would be his position after 6 years?
He can make good profits from the sales of shoes and can use these profits to finance his future business. In due course of time, he would become well-off or self-dependent and would stop borrowing money from any source of credit.
What are the reasons that make Swapna’s situation so risky? Discuss factors – pesticides; role of moneylenders; climate.
Swapna is a small farmer. Being unable to meet the expenses of cultivation, she takes a loan from the moneylender. In the beginning she was very hopeful. Unfortunately the crop fails being hit by pests. Though Swapna sprays her crops with expensive pesticides, it makes little difference. Finally she fails to repay the moneylender.
The moneylender proves to be an unkind man. He charges high interest rates as a result of which Swapna falls in debt. Next year she again takes loan. Although she gets a normal crop this year, the earnings are not enough to cover the previous loan. Hence, she sells a part of the land to pay off the debt.
The climate is a major factor in worsening Swapna’s condition. Had it favoured her, she would not have fallen in debt trap.
Let’s Work These Out (NCERT Textbook page 45)
Why do lenders ask for collateral while lending?
If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment. It is, therefore, lenders ask for collateral while lending.
Given that a large number of people in our country are poor, does it in any way affect their capacity to borrow?
Since the poor lack collateral to offer, so they have low capacity to borrow. They usually do not go to banks or cooperatives to get loan. Instead, they take loans from moneylenders, friends, relatives, etc.
Fill in the blanks choosing the correct option from the brackets:
While taking a loan, borrowers look for easy terms of credit. This means …………… (a) …………….. (low/high) interest rate ……… (b)……….. (easy/tough) conditions for repayment ……………… (c)……………. (less/more) collateral and documentation requirements.
Let’s Work These Out (NCERT Textbook page 47)
List the various sources of credit in Sonpur.
The various sources of credit in Sonpur are-
- Village moneylender
- Landowner as moneylender
- Commercial banks
- Krishak cooperative society
Underline the various uses of credit in Sonpur in the passage given on (Textbook page 47).
Loans for the purchase of agricultural implements, loans for cultivation and agricultural trade, fishery loans, etc.
Compare the terms of credit for the small farmer, the medium farmer and the landless agricultural worker in Sonpur.
|Terms of credit for small farmer||Terms of credit for medium farmer||Terms of credit for landless agricultural worker|
|High rate of interest||Medium farmers usually take loans from banks or cooperatives, who charge very low rate of interest.||These workers having no means to repay the loan in cash, pledge to repay loan by working for the land owner.|
|Promise to sell crops to traders at low prices as repayment of loan.||Loan can be paid back in the next three years.||Very high rate of interest.|
Why will Arun have a higher income from cultivation compared to Shyamal?
(i) Arun has seven acres of land. He gets bank loan for cultivation at an interest rate of 8.5 per cent per annum. Shyamal, on the other hand, gets loan from the village moneylender at a rate of interest 5 per cent per month (60% per annum).
(ii) Arun has the capacity to repay the loan to the bank. He even plans to repay the loan after the harvest and applies for a fresh loan from the bank. But Shyamal lacks this capacity. What is more, he is bound to sell his produce to the moneylender who gives a low price.
(iii) Arun is free to sell his produce at market rates but Shyamal is not. These are the reasons why Arun has a higher income from cultivation as compared to Shyamal.
Can everyone in Sonpur get credit at a cheap rate? Who are the people who can?
No. Everyone in Sonpur cannot get credit at a cheap rate. However, there are some people who can get loan on cheaper interest rate such as people having land or other asset, members of cooperative society, etc.
Tick the correct answer.
(i) Over the years, Rama’s debt
(a) will rise
(b) will remain constant
(c) will decline
(ii) Arun is one of the few people in Sonpur to take a bank loan because
(a) other people in the village prefer to borrow from the moneylenders.
(b) banks demand collateral which everyone cannot provide.
(c) interest rate on bank loans is same as the interest rate charged by the traders.
(a) will rise
(b) banks demand collateral which everyone cannot provide.
Talk to some people to find out the credit arrangements that exist in your area. Record your conversation. Note the differences in the terms of credit across people.
Let’s Work These Out (NCERT Textbook page 50)
What are the differences between formal and informal sources of credit?
The differences between formal and informal sources of credit are given below
|(i) Among the formal sector people can take loans from banks and cooperatives.||(i) The informal lenders include moneylenders, traders, employers, relatives and friends, etc.|
|(ii) The Reserve Bank of India supervises the functioning of formal sources of loans.||(ii) There is no organisation which supervises the credit activities of lenders in the informal sector.|
|(iii) Formal sector loans are given at a low rate of interest.||(iii) Informal sector loans are given at a high rate of interest.|
|(iv) It is the richer households who receive credit from formal sources.||(iv) The poor have to depend on the informal sources.|
|(v) Formal sector loans require documentation and collateral. This is used as a guarantee to the lender until the loan is paid back.||(v) Informal sector loans do not require collateral.|
Why should credit at reasonable rates be available for all?
Credit at reasonable rates should be available for all to enable the poor to get cheaper loans. Usually they avoid loans due to high rate of interest. If cheaper loans are available for them, they will improve their condition by dint of this facility.
Should there be a supervisor, such as the Reserve Bank of India, that looks into the loan activities of informal lenders? Why would its task be quite difficult?
Yes. There should be a supervisor for looking into the loan activities of informal lenders. Its task is quite difficult because informal sector constitutes many people such as moneylenders, friends, relatives, traders, etc. These people are involved in different kinds of businesses of their own besides lending. Also, they are not registered with the government.
Why do you think that the share of formal sector credit is higher for the richer households compared to the poorer households?
The share of formal sector credit is higher for the richer households compared to the poorer households because richer households have better capacity to repay the loans within given frame of time. Also, they have collateral and other necessary documents which are required by the banks and cooperatives. Poor people usually lack collateral or other assets.
Economics Class 10 Chapter 3 NCERT Textbook Questions and Answers
In situations with high risks, credit might create further problems for the borrower. Explain.
It is true that in situations with high risks, credit might create further problem for the borrower. This can be better understood with an example. Suppose a small farmer takes a loan from a moneylender at a high rate of interest to meet the expenses of cultivation, hoping that his/her harvest would help repay the loan. Midway through the season, his/her crop is ruined due to pests or scanty rainfall. In such a situation the poor farmer fails to repay the moneylender and debt grows over the year into a large amount.
Next year the farmer takes a fresh loan for cultivation. Although this year he/she gets a normal crop, his/her earnings are still not enough to cover the previous loan. This pushes him/her into debt. To get out of it, he/she sells a part of the land. Credit in this case creates a situation from which recovery is very painful for the borrower.
How does money solve the problem of double coincidence of wants? Explain with an example of your own.
In the barter system, commodities are exchanged with commodities without the use of money. In this type of exchange, both parties have to agree to sell and buy each other’s commodities. This is known as double coincidence of wants. What a person desires to sell is exactly what the other wishes to buy. Money solves the problem of double coincidence of wants by acting as a medium of exchange. A person holding money in hand can easily exchange it for any commodity or service that he/she wants.
We can better understand it with an example. Suppose a green grocer wants a mobile phone but the owner of the mobile phone wants a wrist watch. In such a situation, the green grocer can use money to get the mobile phone. In the same way, the mobile phone owner too will use money to get the wrist watch. Both parties are independent to buy the things of their need because both have money. In this way, money solves the problem of double coincidence of wants.
How do banks mediate between those who have surplus money and those who need money?
- People having surplus money, deposit it with the banks by opening a bank account in their name. Banks keep only a small proportion of their deposits as cash with themselves.
- They (banks) use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities.
- Banks fulfil people’s loan requirements by using these deposits. In this way, they mediate between those who have surplus money and those who are in need of this money.
Look at a 10 rupee note. What is written on top? Can you explain this statement?
A 10 rupee note has ‘RESERVE BANK OF INDIA’ written on the top, followed by a statement ‘GUARANTEED BY THE CENTRAL GOVERNMENT.’
What this means is that the Reserve Bank of India or RBI has been authorised by the Central Government to issue 10 rupee note. Without this authority given by the Central Government the 10 rupee note is mere a piece of paper and nothing more than that.
In India, the Reserve Bank of India issues currency notes on behalf of the Central Government. As per Indian law, no other individual or organisation is allowed to issue currency. Moreover, the statement on the 10 rupee note makes it clear that the RBI is the central organ in the working of money-related activities.
Why do we need to expand formal sources of credit in India?
Compared to the formal lenders which include banks and cooperatives, most of the informal lenders charge a much higher interest on loans. Thus, the cost to the borrower of informal loans is much higher.
Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan. Hence, borrowers have less income left for themselves. In certain cases, the high interest rate 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. For these reasons, banks and cooperative societies need to lend more. This would lead to higher income and many people could then borrow cheaply for a variety of needs.
What is the basic idea behind the SHGs for the poor? Explain in your own words.
(i) The basic idea behind the Self Help Groups or SHGs is meant to create self- employment opportunities for the rural poor.
(ii) The SHGs help borrowers overcome the problem of lack of collateral. They can get timely loans for a variety of purposes and at a reasonable interest rate.
(iii) Moreover, the SHGs are the building blocks of organisation of the rural poor. Not only does it help women to become financially self-reliant, the regular meetings of the group provide a platform to discuss and act on a variety of social issues such as health, nutrition, etc.
What are the reasons why the banks might not be willing to lend to certain borrowers?
The banks might not be willing to lend to certain borrowers because of the following reasons
(i) Bank loans require proper documents and collateral. A number of borrowers don’t possess any-thing which they can use as collateral.
(ii) The main demand for loans is for crop production. Repayment of the loan is crucially dependent on the income from farming which is highly uncertain.
(iii) There are high risks in agricultural sector. No one can say with guarantee that the crop will be good or it will be ruined. And if the crop is ruined, the farmer will not be able to repay the loan. That is why banks have no interest to lend to such borrowers who lack collateral.
In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
The Reserve Bank of India supervises the functioning of banks in the following ways-
(i) We know that the banks maintain a minimum cash balance out of the deposits they receive. The RBI monitors the banks in actually maintaining cash balance.
(ii) The RBI sees that the banks give loans not just to profit-making businesses 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.
(iii) This supervision acts as a check on the banks. The RBI makes sure that banks do not loan out more money than they are supposed to. This is important to avoid crisis situations.
Analyse the role of credit for development.
(i) A large number of transactions in our day-to-day activities involve credit in some form or the other. Credit means loan which the borrower gets from the lender in the form of money, goods or services in return for the promise of future payment.
(ii) Credit can play a vital and positive role in a certain situation. Suppose a small businessman obtain credit to expand his business. If he gets success in his goal and makes a good profit, he will repay the money in time that he had borrowed.
(iii) He will then spend the surplus money in expanding his business. If this continues for a few years, he will become an established businessman. Here, credit helps to increase earnings and therefore the person is better off than before.
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.
(i) If Manav has a collateral or some other asset, he can get a loan from the bank. If he lacks such an asset, he will have to move to a moneylender.
(ii) Getting a loan from a bank is time consuming and a little bit difficult too. If Manav is in hurry, he won’t waste time and will go to a moneylender even though the latter charges a higher interest rate.
(iii) If Manav needs a loan for a short time period, he will definitely prefer a money lender. If he needs a loan for a long period, he will go to the bank.
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?
(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.
(a) Banks might be unwilling to lend to small farmers because of two reasons
- Small farmers usually lack collateral or any other asset.
- Repayment of the loan is crucially dependent on the income from farming. Needless to say that income from farming is highly uncertain.
(b) The other sources from which the small farmers can borrow are—moneylenders, traders, employers, relatives and friends, etc.
(c) Swapna took a loan from a moneylender to meet the expenses of cultivation, hoping that her harvest would help repay the loan. But the failure of crop made loan repayment impossible. She had to sell a part of the land to repay the loan. Credit, instead of helping Swapna improve her earnings, left her worse off. Credit in this case pushes the borrower into a situation from which recovery is very painful.
(d) Small farmers can form their own cooperatives to get cheap loans from them and that without any asset.
Fill in the blanks.
(i) Majority of the credit needs of the …………….. households are met from informal sources.
(ii) …………………. costs of borrowing increase the debt-burden.
(iii) ……………………. issues currency notes on behalf of the Central Government.
(iv) Banks charge a higher interest rate on loans than what they offer on……………
(v) …………………… is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.
(iii) The Reserve Bank of India
Choose the most appropriate answer.
(i) In a SHG most of the decisions regarding savings and loan activities are taken by
(c) Non-government organisation.
(ii) Formal sources of credit does not include
The following table shows people in a variety of occupations in urban areas. What are the purposes for which the following people might need loans? Fill in the column.
|Occupations||Reason for needing a loan|
|Graduate student who is computer literate|
|A person employed in government service|
|Migrant labourer in Delhi|
|A worker whose factory has closed down.|
Next, classify the people into two groups based on whom you think might get a bank loan and those who might not. What is the criterion that you have used for classification?
Do it yourself.
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