CBSE Class 10 Economics • Chapter 3
Money and Credit Class 10 Questions and Answers
Complete NCERT-based revision with very short, short and long answer questions covering money, barter, banks, credit, terms of credit, formal and informal sources, debt traps and Self-Help Groups.
30Very Short
30Short Answer
20Long Answer
80Total Q&A
Money and Credit Class 10 Questions & Answers • NCERT Class 10 Economics
Complete Money and Credit Revision
Use this page for written-answer preparation, then practise the companion MCQs to test the same concepts.
How to use this page: First answer the very short questions from memory. Then practise the short answers in clear points. Finally, write the long answers independently before comparing them with the model answers.
Exam focus: Pay special attention to double coincidence of wants, demand deposits, the role of banks, terms of credit, collateral, formal and informal credit, debt traps and Self-Help Groups.
Money and Credit: Very Short Answer Questions
Questions 1–30Quick-recall questions for definitions, facts and one- or two-line answers.
1
What is barter system?
Answer: Barter is the direct exchange of goods and services without using money.
2
What is double coincidence of wants?
Answer: It is a situation in which two people must each want what the other has and be willing to exchange it.
3
Why is barter difficult?
Answer: Barter is difficult because it requires a double coincidence of wants between the people involved in the exchange.
4
What is money?
Answer: Money is a commonly accepted medium of exchange used to buy and sell goods and services.
5
What is meant by a medium of exchange?
Answer: A medium of exchange is something commonly accepted as payment for goods and services.
6
Name two modern forms of money.
Answer: Currency and demand deposits in banks are two modern forms of money.
7
What are demand deposits?
Answer: Demand deposits are bank deposits that can be withdrawn whenever the depositor demands them.
8
Why are demand deposits considered money?
Answer: They can be used to make payments through banking instruments such as cheques and are widely accepted in transactions.
9
What is a cheque?
Answer: A cheque is a written instruction to a bank to pay a specified amount from the account of the person issuing it.
10
What is a bank deposit?
Answer: A bank deposit is money kept by a customer in a bank account.
11
What is credit?
Answer: Credit is an arrangement in which a lender provides money, goods or services to a borrower with an agreement of future repayment.
12
What is collateral?
Answer: Collateral is an asset offered by a borrower as security against a loan.
13
Give one example of collateral.
Answer: Land, a building, a vehicle or livestock can serve as collateral, depending on the loan agreement.
14
What is interest on a loan?
Answer: Interest is the additional amount paid by a borrower to the lender for using borrowed money.
15
Name two terms of credit.
Answer: Interest rate and collateral are two important terms of credit.
16
What is a formal source of credit?
Answer: A formal source of credit is an institutional lender such as a bank or cooperative society operating within the formal financial system.
17
Name two formal sources of credit.
Answer: Banks and cooperative societies are formal sources of credit.
18
What is an informal source of credit?
Answer: An informal source is a lender outside the formal institutional credit system, such as a moneylender, trader, employer, relative or friend.
19
Name two informal sources of credit.
Answer: Moneylenders and traders are two informal sources of credit.
20
What is a debt trap?
Answer: A debt trap is a situation in which a borrower struggles to repay a loan and may have to borrow again to meet repayment obligations.
21
What is a Self-Help Group?
Answer: An SHG is a small group that encourages regular savings and provides small loans to its members from pooled savings.
22
What does SHG stand for?
Answer: SHG stands for Self-Help Group.
23
Why do SHG members save regularly?
Answer: Regular savings create a common fund from which members can obtain small loans.
24
Who supervises banks in India?
Answer: The Reserve Bank of India (RBI) supervises banks in India.
25
Why do banks keep a small portion of deposits as cash?
Answer: Banks keep cash to meet the withdrawal requirements of their customers.
26
What is meant by affordable credit?
Answer: Affordable credit is credit available on terms that keep the repayment burden manageable for the borrower.
27
Why is cheap credit important?
Answer: Cheap credit can help borrowers undertake productive activities without facing an excessive interest burden.
28
What is the main function of banks in the credit system?
Answer: Banks accept deposits and use a major portion of those deposits to provide loans.
29
Give one example of productive credit use.
Answer: A farmer may borrow to buy seeds and other inputs needed for cultivation.
30
Why can credit be risky?
Answer: If income is insufficient to repay the principal and interest, borrowing can create prolonged indebtedness or a debt trap.
Money and Credit: Short Answer Questions
Questions 31–60Practice 2–3 mark answers using definitions, clear points and relevant examples.
31
Why was the barter system inconvenient?
Answer: Barter required a double coincidence of wants. A person had to find someone who both wanted what they offered and possessed what they wanted. This made exchanges difficult and time-consuming.
32
How does money remove the problem of double coincidence of wants?
Answer: Money is commonly accepted as a medium of exchange. A person can sell a product for money and later use that money to buy another product. Therefore, the buyer and seller do not need to have matching wants.
33
Why is currency accepted as money?
Answer: Currency is accepted because it is legally recognised and widely accepted for making payments. People accept it because they are confident that others will also accept it in exchange for goods and services.
34
Explain why demand deposits are considered a form of money.
Answer: Demand deposits can be withdrawn on demand and used for payments. Cheques and other banking facilities allow depositors to make transactions without carrying cash, so these deposits function as money.
35
How do cheques make payments easier?
Answer: A cheque allows a person to instruct the bank to transfer or pay money from their account. It reduces the need to carry large amounts of cash and makes many transactions convenient.
36
How do banks connect savers and borrowers?
Answer: Banks accept deposits from people who have surplus funds and lend a major portion of those deposits to people who need funds. In this way, banks act as intermediaries between depositors and borrowers.
37
Why do banks keep only a small proportion of deposits as cash?
Answer: Banks need some cash to meet everyday withdrawals. They can use a major portion of deposits for lending, which enables them to provide credit and earn income.
38
How do banks earn income from lending?
Answer: Banks generally charge borrowers a higher interest rate than the interest they pay on deposits. The difference between these rates is an important source of bank income.
39
What are the main terms of credit?
Answer: The main terms include the interest rate, collateral requirements, documentation requirements and conditions for repayment. These terms determine the cost and obligations attached to a loan.
40
Why is collateral demanded by lenders?
Answer: Collateral provides security to the lender. If the borrower fails to repay, the lender may have rights over the pledged asset according to the loan agreement.
41
Why may poor borrowers find formal credit difficult to obtain?
Answer: Some poor borrowers may lack acceptable collateral, documents or a stable income record. These requirements can make institutional loans harder for them to access.
42
Differentiate between formal and informal sources of credit.
Answer: Formal sources include banks and cooperative societies and operate within the formal financial system. Informal sources include moneylenders, traders, employers, relatives and friends and do not have the same institutional supervision.
43
Why can informal loans have high interest rates?
Answer: Informal lending is not governed by the same institutional framework as bank credit. Lenders may therefore charge high interest rates, increasing the repayment burden for borrowers.
44
Why should formal credit be expanded?
Answer: Expanding formal credit can provide borrowers with more affordable and transparent loans and reduce dependence on costly informal sources. It can also support productive investment and income generation.
45
How can credit be beneficial to a farmer?
Answer: A farmer can use credit to buy seeds, fertilisers and other inputs before the harvest. If the crop produces enough income, the farmer can repay the loan and benefit from the borrowing.
46
How can a failed crop lead to a debt trap?
Answer: A failed crop can reduce the farmer's income and make loan repayment difficult. The farmer may then have to borrow again to repay earlier obligations, increasing indebtedness.
47
Why are terms of credit important to a borrower?
Answer: The terms determine how much the borrower will pay, what security is required and how repayment must be made. A loan with unsuitable terms can become difficult to repay.
48
What role does the RBI play in the formal credit system?
Answer: The RBI supervises banks and monitors aspects of their functioning and lending. This helps maintain discipline within the formal banking system.
49
Why are banks important for economic activity?
Answer: Banks mobilise deposits and provide loans to households, farmers and businesses. Credit from banks can finance consumption and productive activities and support economic activity.
50
How does a Self-Help Group create a common fund?
Answer: Members contribute regular savings to the group. These contributions are pooled to form a common fund that can be used to provide small loans to members.
51
How do SHGs reduce dependence on moneylenders?
Answer: SHGs create a savings pool from which members can obtain small loans. This gives members an alternative source of credit and can reduce their need to approach moneylenders.
52
Why are SHGs especially useful for poor women?
Answer: SHGs help women save and access small loans collectively. They can improve access to credit, encourage financial participation and support income-generating activities.
53
How can SHGs obtain bank loans?
Answer: After regularly saving and managing their group fund, SHGs can become eligible to obtain loans from banks. Bank linkage can provide the group with access to larger formal credit.
54
Why is affordable credit important for development?
Answer: Affordable credit enables people to finance productive activities without an excessive interest burden. This can support income generation and reduce dependence on expensive informal lenders.
55
How can documentation affect access to formal credit?
Answer: Documentation helps lenders assess borrowers and record loan conditions. However, people who lack required documents may find it harder to obtain formal loans.
56
Why can credit have both positive and negative effects?
Answer: Credit can finance productive activities and increase income when used effectively. But if income is insufficient or the loan terms are unfavourable, repayment can become difficult and create a debt trap.
57
Why is interest an important part of a loan agreement?
Answer: Interest is the cost of borrowing. The interest rate affects the total amount that the borrower must repay, so it is an important term of credit.
58
Why may borrowers prefer formal credit over informal credit?
Answer: Formal loans generally have clearer institutional procedures and are subject to formal supervision. They may also offer more reasonable interest rates than many informal loans.
59
What is meant by productive use of credit?
Answer: Productive use of credit means using borrowed funds for an activity that helps generate income or improve production, such as buying agricultural inputs or business equipment.
60
Why is access to credit not enough by itself?
Answer: The usefulness of credit also depends on its interest rate, repayment conditions, collateral and the purpose for which it is used. Credit with unsuitable terms may increase financial stress.
Money and Credit: Long Answer Questions
Questions 61–80Write these answers in a structured CBSE style with definitions, explanation, examples and a concluding point.
61
Explain how money has made exchange easier than barter.
Answer: In the barter system, exchange required a double coincidence of wants. Each person had to find someone who wanted what they offered and possessed what they wanted. Money removes this difficulty because it is commonly accepted as a medium of exchange. A person can sell a product for money and later use the money to purchase another product. Thus, money separates the act of selling from the act of buying and makes exchange much easier.
62
Explain the role of demand deposits in modern money.
Answer: Demand deposits are balances kept in bank accounts that can be withdrawn on demand. They are considered a form of money because they can be used to make payments. Depositors can use cheques and other banking facilities to transfer money without carrying cash. Since such deposits are widely accepted for settling transactions, they perform the function of money in the modern economy.
63
Describe how banks accept deposits and provide loans.
Answer: Banks accept deposits from customers who have surplus funds. Depositors can withdraw their money according to the conditions of their accounts and may receive interest on deposits. Banks keep a small proportion of deposits as cash to meet withdrawal needs and use a major portion to provide loans. They charge interest on loans and generally pay a lower interest rate on deposits. In this way, banks connect depositors with borrowers and earn income from their lending activities.
64
Explain the terms of credit and why they matter.
Answer: The terms of credit include the interest rate, collateral, documentation requirements and repayment conditions. These terms determine the cost of borrowing and the obligations of the borrower. A low interest rate may make a loan easier to repay, while a high rate increases the repayment burden. Collateral and documentation may also affect access to formal loans. Therefore, borrowers must understand the complete terms before accepting credit.
65
Explain why credit can be useful as well as harmful.
Answer: Credit can be useful when it finances a productive activity that generates enough income to repay the loan. For example, a farmer may borrow for agricultural inputs and repay the loan after selling the harvest. However, credit can become harmful when income is uncertain or insufficient and the borrower cannot meet repayment obligations. Further borrowing may then be needed to repay earlier loans, leading to a debt trap. Thus, the effect of credit depends on its use and terms.
66
Differentiate between formal and informal sources of credit in detail.
Answer: Formal sources include banks and cooperative societies and operate within the formal financial system. Their activities are subject to institutional rules and supervision. Informal sources include moneylenders, traders, employers, relatives and friends. They do not have the same formal institutional supervision. Formal credit generally has clearer terms and may be cheaper, while informal credit may be easier to obtain but can involve high interest rates. Wider access to formal credit is therefore important.
67
Why is cheap and affordable credit important for borrowers?
Answer: Affordable credit reduces the cost of borrowing and makes repayment more manageable. It can help farmers, workers and small producers finance productive activities and increase their income. When formal credit is unavailable, borrowers may turn to informal lenders who charge high interest. This can increase indebtedness. Therefore, affordable institutional credit can support productive investment and reduce dependence on costly sources.
68
Explain how a debt trap can affect a borrower.
Answer: A debt trap develops when a borrower cannot generate enough income to repay the loan and interest. The borrower may then take another loan to meet earlier obligations. As debt continues to accumulate, more of the borrower's income may be used for repayment, leaving less for household needs or productive investment. A debt trap can therefore worsen the borrower's financial position and reduce economic security.
69
Explain the role of the Reserve Bank of India in the formal credit system.
Answer: The Reserve Bank of India plays an important supervisory role in the formal banking system. It supervises banks and monitors aspects of their functioning and lending. This institutional oversight helps maintain discipline and supports the functioning of formal credit. The chapter also highlights the importance of expanding formal credit so that more borrowers can obtain loans on reasonable terms.
70
Explain the importance of collateral in credit arrangements.
Answer: Collateral is an asset offered by the borrower as security against a loan. Examples include land, buildings, vehicles or livestock. It protects the lender against the possibility of non-repayment because the lender may have rights over the pledged asset according to the agreement. However, people who do not own acceptable assets may find it difficult to obtain loans that require collateral. Thus, collateral can affect access to formal credit.
71
Describe the functioning of Self-Help Groups.
Answer: A Self-Help Group consists of a small number of members who save regularly. Their savings are pooled into a common fund. Members can take small loans from this fund for different needs. Regular savings and repayment help the group build financial strength and may enable it to obtain bank credit. SHGs therefore create a collective mechanism for savings and borrowing, especially for people who may face difficulties accessing conventional loans.
72
How do Self-Help Groups improve access to credit for poor households?
Answer: SHGs encourage regular savings and create a common fund from which members can obtain small loans. This provides an alternative to depending entirely on moneylenders. As the group develops a record of saving and repayment, it may become linked with banks and gain access to formal credit. SHGs can therefore improve access to small loans and strengthen the financial position of members.
73
Why are Self-Help Groups often associated with women's empowerment?
Answer: SHGs provide women with a collective space for saving, borrowing and financial decision-making. Access to small loans can support income-generating activities and reduce dependence on informal lenders. Regular group meetings can also increase participation in collective decisions. Thus, SHGs can strengthen women's economic participation while improving access to credit.
74
Explain why informal credit can be a problem for poor borrowers.
Answer: Informal lenders may provide loans easily, but they can charge high interest rates and impose terms that increase the repayment burden. Poor borrowers may already have uncertain or low incomes, so high interest can make repayment difficult. In some situations, repeated borrowing can lead to a debt trap. Expanding access to affordable formal credit can reduce dependence on such sources.
75
Explain why formal credit should reach more people in rural areas.
Answer: Rural borrowers need credit for farming, small businesses and other activities. If formal institutions do not reach them adequately, they may depend on informal lenders. Expanding formal credit can provide loans with more transparent terms and reasonable interest rates. It can support productive activities, improve income opportunities and reduce dependence on costly informal sources.
76
Compare the role of banks and moneylenders in providing credit.
Answer: Banks are formal institutions that accept deposits and provide loans within a supervised financial system. Their loans generally follow documented procedures and specified terms. Moneylenders are informal lenders who may provide credit more easily but can charge high interest rates. Borrowers without collateral or documents may find moneylenders more accessible, but the cost of such credit can be high.
77
Explain how the same loan can have different outcomes for different borrowers.
Answer: The outcome of borrowing depends on the purpose of the loan, the borrower's income, the risks involved and the terms of credit. A borrower who uses credit for a productive activity and earns enough to repay may benefit. Another borrower facing an income shock or high interest rate may struggle to repay. Thus, credit is not automatically beneficial or harmful; its effect depends on the circumstances and terms.
78
Explain the importance of banks in the modern economy.
Answer: Banks provide a safe place for people to keep deposits and make those deposits available for lending. They connect people with surplus funds to people who need credit. Through loans, banks support farming, business and other economic activities. Banking facilities also make payments easier through deposits, cheques and related services. Thus, banks are important intermediaries in the modern monetary and credit system.
79
Discuss the importance of a well-functioning formal credit system.
Answer: A well-functioning formal credit system makes loans available through institutions such as banks and cooperatives. Formal lending provides defined procedures and institutional supervision. Affordable formal credit can help households and producers finance productive activities and reduce dependence on expensive informal lenders. Wider access is particularly important for borrowers who need reliable credit for farming, business and other income-generating activities.
80
What is the central message of the chapter Money and Credit?
Answer: Money makes exchange easier by removing the need for double coincidence of wants. Banks connect depositors and borrowers and make modern credit possible. Credit can support economic activity when it is used productively and provided on manageable terms, but it can also create a debt trap when repayment becomes difficult. The chapter therefore emphasises accessible and affordable formal credit and highlights the role of Self-Help Groups in improving access to small loans.
Quick Revision — Money and Credit
- Barter requires a double coincidence of wants.
- Money acts as a commonly accepted medium of exchange.
- Modern money includes currency and demand deposits.
- Banks accept deposits and use a major portion for lending.
- Credit can support productive activity but can also create a debt trap.
- Terms of credit include interest, collateral, documentation and repayment conditions.
- Formal credit includes banks and cooperative societies.
- The RBI supervises banks within the formal banking system.
- Informal credit includes moneylenders, traders, employers, relatives and friends.
- SHGs pool savings and improve access to small loans, especially for poor borrowers and women.
Continue Your Chapter 3 Revision
After completing these questions, test your understanding with the chapter's MCQs.