Wednesday, 26 December 2012

Notes on Money and Credit | MCQs & Q&A

Notes on Money and credit for class 10

Class 10 | Economics | Unit 03 | NCERT

Things to remember:
• Money is anything which is commonly accepted as a medium of exchange and in discharge of debts.

• People exchange goods and services through the medium of money. Money by itself has no utility. It is only an intermediary. The use of money facilitates exchange.

• Direct exchange of goods against goods without use of money is called barter exchange (i.e. Exchange of goods for goods). This is also known as CC economy (i.e. commodity for commodity economy).

• Simultaneous fulfillment of mutual wants by buyers and sellers is known as double coincidence of wants. Let us understand this concept with the help of an example:
A shoe manufacturer wants to sell his shoe in the market and buy wheat. Now he has to directly exchange shoe for wheat without the use of money. He would have to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy shoes in exchange.

• Before the introduction of coins, a variety of objects were used as money.
For example, since the very early ages , Indians used grains and cattle as money. There after came the use of metallic coins –gold, silver, copper coins. This process was finally taken over by the paper money (which means currency notes). As the value of transactions increased, even paper money started becoming inconvenient because of time involved in its counting and space required for its safe keeping. This led to the introduction of bank money(credit money)in the form of cheque, demand drafts,credit cards etc.

• The major function of the bank is to give loans ,particularly to businessmen and entrepreneurs and there by earn interest.

• Banks get money for providing loans by accepting the deposits from people .Deposits are the lifeline of a bank. There are two types of :time deposits and demand deposits. Time deposits can be withdraw only after a specified period of time. Demand deposits in the bank can be withdraw on demand by issuing cheques.

• The facilities of cheques against demand deposits make it possible to directly settle payments without the use of cash.

• Credit(i.e. giving loans ) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payments with interest. Credit place a vital and positive role in the society .This can be explained further with the help of suitable examples. Saleem obtain loans to meet the needs of protection which helps him to meet the need of on going expenses of production ,complete production in time and thereby increase his earnings.

• Sometimes, credit, instead of helping people, pushes them into a debt trap. In Swapana’s case who is a farmer, the failure of crop made loan repayment impossible. credit in this case pushes the borrower into a situation from which recovery is painful.

• Terms of credit include interest rate, collateral and documentation requirements and the mode of repayment. The terms of credit may vary depending on the lender and the borrower.

• Collateral is an asset that the borrower owns (such as land, vehicles, livestock etc.)and uses this as a guarantee to the lender until the loan is repaid.

• Formal credit is generally available with the banks and cooperatives. They charge lesser rates of interest than informal institutions. The Reserve Bank of India (RBI) supervises the functioning of formal sources of loan.

• The idea behind self-help Groups is to organize the rural poor into self-help groups and collect their savings. Saving per member varies from Rs25 toRs100 or more depending on the ability of the people to save. Members can take small loans from the group itself to meet their own needs. The group charges less rate of interest on these loans. If the group is regular in savings, it becomes eligible for availing loan from the bank.


1. The exchange of goods for goods is:
(i) banker of option
(ii) bills of exchange
(iii) barter
(iv) currency

2. Currency is issued by:
(i) RBI on behalf of central government
(ii) By president of India.
(iii) By finance minister
(iv) None of them

3. National Sample Survey Organisation is a:
(i) Commercial bank organisation
(ii) An organisation of World Bank
(iii) An organisation associated with Indian Standard Institute
(iv) An institution responsible to collect data on formal sector credit.

4. Gold mohar, a coin so named was brought in circulation by:
(i) Akbar
(ii) Sher Shah Suri
(iii) Ashok
(iv) Shivaji

5. Which agency is not included in informal loan sector or agency:
(i) Bank
(ii) Village money lender
(iii) Trader
(iv) Relative of borrower

6. In SHG most of the decisions regarding savings and loan activities are taken by:
(i) Bank
(ii) Members
(iii) Non-government organisations
(iv) LIC

7. Formal sources of credit do not include:
(i) Banks
(ii) Co-operatives
(iii) Employers
(iv) LIC

8. Security (pledge, mortgage) against loan:
(i) Collateral
(ii) Token Coins
(iii) Promisory Note

9. The founder of Grameen bank of Bangladesh is:
(i) Amartya Sen
(ii) Mohammad Salim
(iii) Mohammad Yunus
(iv) None of the above

10. A bill of exchange promising payment to a certain sum written there in:
(i) Currency
(ii) Collateral
(iii) Promisory note
(iv)Bank rate
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1(iii) 2(i) 3(iv) 4(i) 5(i) 6(ii) 7(iii) 8(i) 9(iii) 10(iii)

Question Annswers of Money And Credit

1. Give the meaning and functions of money.
Ans. Meaning of money: Money may be anything chosen by common consent as a medium of exchange and measure of value.

Functions of money:

Primary functions:-
(1) Medium of exchange
(2) Medium of value

Secondary functions:-
(1) Store of value
(2) Standard of deferred payments
(3) Transfer of value

Contingent functions:
(1) Basis of credit
(2) Liquidity
(3) Maximum utilisation of resources
(4) Guarantor of solvency
(5) Distribution of National Income

2. What monetary system does India follow?
Ans. India follows the following monetary system:
(a) India has adopted a representative paper currency or the managed currency standard.
(b) The monetary standard is synonymous with the standard money adopted. Paper currency in India is the unlimited legal tender i.e. it is used to settle debts and make payments against all transactions.
(c) RBI (The Reserve Bank of India) issues all currency notes and coins except one rupee notes and coins which are issued by the ministry of finance.
(d) The system governing note issues the minimum reserve system viz. certain quantity of gold is kept in reserve.

3. What is banking? Give the main features of commercial banking.
Ans. Banking is defined as the accepting of deposits for the purpose of lending or investment of deposited money by the public, repayable on demand or otherwise and withdrawal by cheque, draft order or otherwise.
Main features of commercial banks are as follows:
(i) It deals with money, it accepts deposits and advances loans.
(ii) It also deals with credit, it has the power to create credit.
(iii) It is a commercial institution, whose aim is to earn profit.
(iv) It is a unique financial institution that creates demand.
(v) It deals with the general public.

4. Differentiate between demand deposits and fixed deposits.
The difference between demand deposits and fixed deposits:
(i) These deposits can be withdrawn by their depositors at any time without notice.
(ii) They are chequable i.e. demand deposits are withdraw able through cheques.
(iii) No interests are paid on these deposits. Rather depositors have to pay something in the bank for its services.
(iv) These deposits constitute a part of money supply.

5. What are the different forms in which the commercial banks advance loans?
Ans. Banks normally advance three types of loans:

(i) Ordinary loans: these are simple loans extended by banks for different purposes both consumption and investment. The amount of loan granted is credited to the borrower‘s deposit account with the bank and can easily be withdrawn in cash or by writing cheques.

(ii) Overdraft: Overdraft facility is extended to the customers who maintain a current account with the bank. Under this system banks honour cheques issued by customers in excess of the balance in their accounts.

(iii) Discounting bills: Bill means a bill of exchange. Banks extend credit facilities by discounting bills of exchange. Banks discounts the bills after charging the interest for the period and cost of collection.

1. Discuss the historical origin of money.
Ans. Historical origin of money:
(a) Animal money: First of all, human beings used animals as a medium of exchange. For example, the Vedic literature tells us that cows or horses were used as money in India.
(b) Commodity money: Before the invention of money several commodities were used as money. Even today in small villages food-grains like, wheat, horse gram, rice etc. are used as commodity money.
(c) Metallic money: Man used metal, like copper, silver, gold, etc. as a medium of exchange. Coins were minted by goldsmith and used as money until paper money was invented.
(d) Paper money: China was the first country that started using representative paper currency standard. Certain quantity of gold is kept as reserve in proportion to currency notes issued at the particular point of time. Coins are also used besides paper currency in our country.
(e) Credit money: Credit money is also known as bank money. It refers to bank deposits kept by people with banks which are payable on demand and can be transferred from one party to another through cheque/ demand drafts/pay orders etc.

2. Highlight the formal and informal credit sources in India.

Ans. Formal credit sources:
(i) Commercial Banks
(ii) Central Bank
(iii) Government Agency
(iv) LIC
(v) Registered Chit Fund Companies
(vi) UTI
(vii) Mutual Fund Institution Above mentioned all formal financial institutions accept savings and sanction loans to the people, companies and other agencies.

Informal credit sources:(i) Local moneylenders: village mahajan and sarafs or gold smiths in the rural areas or in the cities.
(ii) Land lords: this class include the big, middle and small category land-lords. They accept as collateral, title documents of agricultural land, dwelling unit, factories and issue loans to needy persons and companies.
(iii) Self help groups: thrift and credit societies, union of government servants, cooperative societies and farmers, labourers, domestic helpers and housewives organisations. They also accept savings from different people and help their needy members.
(iv) Chit fund companies and private finance companies are very powerful informal financial institutions. Some of them are working very effectively in villages and cities and all pay more interest to depositors than the formal agencies and institutions.

3. What are main functions of Reserve Bank of India?
Ans. The main function of the central bank is to act as the governor of the machinery of credit in order to secure stability of prices. It regulates the volume of credit and currency, pumping in more money when market is dry of cash, and pumping out money when there is credit. Broadly a central bank has two departments namely, issue department and banking department.
The main functions are:
(i) Issue of currency: the central bank is given the sole monopoly of issuing currency in order to secure control over volume of currency and credit. These notes circulate throughout the country as legal tender money.
(ii) Banker to the government: central bank functions as a banker to the government – both central and state governments. It carries out all banking business of the government.
(iii) Banker’s bank and supervisor: Central Bank acts as banker‘s bank in three capacities-
(a) it is custodian of their cash reserves.
(b) Central Bank is lender of last resort.
(c) It acts as a bank of central clearance, settlements and transfers.
(d) Controller of credit and money supply: it is an important function of a central bank to control credit and money supply through its monetary policy.
There are two parts of monetary policy, viz, currency and credit. Central bank has a monopoly of issuing notes and thereby can control the volumes of currency. It controls credit and money supply by adopting quantitative and qualitative measures.

4. Explain the composition and functioning of SHG in rural India.

Ans. Self Help Groups are organisations formed by rural people and women in particular. Members to these groups are daily wagers, labourers, small farmers and agricultural workers.
A typical SHG has fifteen to twenty members. They meet daily and save regularly. Saving per member, per day varies from Rs. 25 to Rs. 100 or even more depending on their ability of earning and saving. These groups charge interests on amount given as loan to their members but at negligible rates.
After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank. Loan is sanctioned in the name of group and is meant to create self employment opportunities for the members.
For instance, small loans are provided to the members for releasing mortgaged land, for meeting working capital needs (e.g. buying seeds, fertilisers, raw materials like bamboo and cloth) for housing materials and for acquiring assets like sewing machines, handlooms, cattle etc.

5. What do the banks do with the deposits which they accept from the public which they accept from the Public?

Ans. Banks keep only a small proportion of their deposits as cash with themselves. For example, banks in India these days hold about 15% of their deposits as cash. This is kept as 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 the cash.
Banks use the major portion of the deposits to extend loans. There is huge demand for loans for various economic activities. Banks make use of the deposits to meet the loan requirements of the people.
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 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.

Activities for :- Money and credit

1.Collect the details of different loan facility announced by the Banks , co-operatives and financial institutes. (rate of interest collateral, various schemes offered for loans).
2. Various Performa’s and forms related to bank and banking procedure.
Hints: deposit slip, withdrawal slip, loan procedure, and account opening etc.


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