CBSE Class 10 Economics Money And Credit Worksheet Set C

Very Short Answer Type Questions

Question: What is credit?
Answer: Credit (loan) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.

Question: Why do farmers require credit?
Answer: To purchase the raw materials and inputs for agriculture.

Question: Explain the inherent problem of the ‘barter system’.
Answer: The inherent problem of the barter system is that it is not necessary that when one person is willing to exchange his/her goods, the person he/she wants to exchange with is also willing to do the same.

Question: What are formal sources of credit?
Answer: Banks and Cooperative societies which charge less interest on loan are called formal sources of credit.

Question: Why do banks or lenders demand collateral against loans?
Answer: Bank or lenders demand collateral against loans as it is used as a guarantee to a lender until the loan is repaid.

Question: Why are demand deposits considered as money?
Answer: Demand deposits are considered as money because they can be withdrawn from the bank as and when needed. Also, they are accepted widely as a means of payment by way of a cheque instead of cash.

Question: What is Barter System?
Answer: It is a system of exchange in which goods are directly exchanged without the use of money.

Question: Give one example each of modern currency and old currency.
Answer: Modern currency – Paper notes/coins, old currency – metallic coins like gold, silver & copper coins.

Question: Why do banks maintain cash reserve?
Answer: To arrange for daily withdrawals by depositors.

Question: Why are most of the poor households deprived from the formal sector of loans?
Answer: Because they cannot fulfil the formalities of the formal sector of loan.

Question: Krishna is working in a neighboring field on very less wage. Expenses on sudden illnesses or functions in the family are also met through loan. The landowner charges an interest rate of 5% per month. At present, she owes the landowner ₹ 5,000. Analyse his credit arrangements given above.
Answer: Krishna takes loan from an informal source (her landowner) who provides loan without collaterals or documents and charges a very high rates of interest for profit. The 5% per month interest has lead him into a debt trap.

Question: Explain the importance of formal sector loans in India.
Answer: Importance of formal sector loans in India: Low interest rate.

Question: Give any one example of the methods to make payment without using cash.
Answer: Online transfer, by cheque (Any one).

Question: What are the two forms of modern currency?
Answer: Paper notes and coins.

Question: Who supervises the functioning of formal sources of loan?
Answer: Reserve Bank of India (RBI).

Question: Explain the importance of ‘Collateral’.
Answer: Importance of ‘Collateral’: It is used as a guarantee to a lender until the loan is repaid.

Question: Give any two examples of informal sector of credit.
Answer: (i) Credit from ‘moneylenders’.
(ii) Credit from ‘family members’.

Short Answer Type Questions

Question: Why is cheap and affordable credit important for the country’s development? Explain any three reasons.
Answer: Importance of cheap and affordable credit for the country’s development:
(i) Cheap and affordable credits would lead to higher income.
(ii) Many people could borrow for a variety of needs.
(iii) It encourages people to invest in agriculture, do business and set up small scale industries, etc.
(iv) It enables more investment which will lead to acceleration of economic activities.
(v) Affordable credit would also end the cycle of debt-trap.
(vi) Any other relevant point. (Any three points)

Question: Why is modern currency accepted as a medium of exchange without any use of its own? Find out the reason.
Answer: Modern currency is accepted as a medium of exchange without any use of its own because:
(i) Modern currency is authorised by the government of a country.
(ii) In India, the Reserve Bank of India issues all currency notes on behalf of the central government.
(iii) No other individual or organisation is allowed to issue currency.
(iv) The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India.
(v) No individual in India can legally refuse a payment made in rupees. 

Question: Why do banks and co-operative societies need to lend more? Explain.
Answer: Banks and cooperative societies need to lend more:
(i) This would lead to higher incomes.
(ii) People could borrow cheaply for a variety of needs.
(iii) They could grow crops and set up small-scale industries, etc.
(iv) Cheap and affordable credit is crucial for the country’s development.
(v) To save and reduce the dependence on informal sources of credit.
(vi) It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.

Question: Imagine yourself to be XYZ, a member of a women Self Help Group. Analyse the ways through which your group provides loan to the members. 
Answer: (i) Self Help Groups pool their savings.
(ii) A typical SHG has 15–20 members, usually belonging to one neighbourhood, who meet and save regularly.
(iii) Saving per member varies from Rs. 25 to Rs. 100 or more, depending on the ability of the people to save.
(iv) Members can take small loans from the group itself to meet their needs.
(v) The group charges interest on these loans but this is still less than what the moneylender charges.
(vi) After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank. 

Question: Why do we need to expand formal source of credit in India?
OR
Explain any three reasons for the banks and cooperative societies to increase their lending facilities in rural areas.
Answer: Expand formal sources of credit in India
(i) To save people from the exploitation of Informal sector,
(ii) Formal charge a low interest on loans,
(iii) To save from debt trap,
(iv) It provides cheap and affordable credit,
(v) RBI also supervises the formal sector credit through various rules and regulations which ensures that banks give loans to small cultivators, small borrowers, etc. and not just to profit making business and traders OR ans. Banks and Cooperatives can help people in obtaining cheap and affordable loans. This will help people to grow crops, do business set up small scale industries or trade goods and also help indirectly in the country’s development.
(i) They should do so, so that relatively poor people do not have to depend on informed sources of credit.
(ii) Formal sector loans need to expand. It is also necessary that everyone receives these loans.
(iii) At present it is the richer households who receive formal credit whereas the poor have to depend on informal sources. It is important that the formal credit is distributed more equally so that poor can be benefitted from the cheaper loans.

Question: Why do banks and cooperative societies need to lend more? Explain.
Answer: Banks and cooperative societies need to lend more.
(1) This would lead to higher incomes
(2) People could borrow cheaply for a variety of needs.
(3) They could grow cropsand set up smallscale industries etc.
(4) Cheap and affordable credit is crucial for the country’s development
(5) To save and reduce the dependence on informal sources of credit
(6) It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.

Question: Describe the importance of formal sources of credit in the economic development.
Answer: Importance of formal sources of credit in the Economic Development:
(i) Formal sources provide cheap credit.
 (ii) Credit at affordable rate is available through formal sources.
(iii) Terms and conditions of credit through formal sources are regulated by government.
(iv) Credit from formal source are favourable.
(v) Any other relevant point. 

Question: How can money be easily exchange itself for goods or services? Give example to explain.
Answer: Money acts as a medium to exchange itself for goods and services: A person holding money can easily exchange it for any commodity or service that he or she wants. Everyone prefers to receive payments in money and exchanges the money for things he wants. For example: A shoemaker wants to sell shoes in the market and buy wheat. The shoemaker will first exchange shoes for money and then exchange the money for wheat. If the shoemaker had to directly exchange shoes for wheat without the use of money, he would have to look for wheat growing farmer who not only wants to sell wheat but also wants to buy the shoe in exchange. Both parties have to agree to sell and buy each other’s commodities. This process is very difficult, time consuming and unhealthy. 

Question: How is money transferred from one bank account to another bank account? Explain with an example.
Answer: Money transfer from one bank account to another bank account: If a person has to make a payment to his or her friend and writes a cheque for a specific amount, this means that the person instructs his bank to pay this amount to his friend. His friend takes this cheque and deposits it in his account in the bank. This said amount is transferred from one bank account to another bank account.

Question: Why are service conditions of formal sector loans better than informal sector? Explain.
Answer: Formal sector are better than informal sector:
(i) Low interest rate.
(ii) Transparency.
(iii) Supervision by the Reserve Bank of India on the functioning of the formal sector.
(iv) No use of unfair means for getting the money back.

Question: Why are service conditions of formal sector loans better than those of the informal sector? Explain.
Answer: The formal sector works under the supervision of the Reserve Bank of India. The rate of interest is very low. Commercial banks and cooperative societies are the main sources of the formal source of credit. They provide ensured services and also have a set protocol for deliverance of loan activities. In the formal sector, the interest rate, collateral and documentation requirement, and the mode of repayment together comprise what we call the terms of credit. The terms of credit vary substantially from one credit arrangement to another. They may also vary depending on the nature of the lender and the borrower.

Question: Why are formal sources of credit preferred over the informal source of credit? Give three reasons. 
Answer: Formal sources of credit preferred over informal sources of credit because:
(i) Formal sources have low cost of borrowing.
(ii) Higher Income through cheap borrowing.
(iii) No exploitation and debt trap. 

Question: Examine any three situations in which credit helps in the development of agriculturists.
Answer: Credit helps in the development of agriculturists:
(1) The credit helps him to meet the ongoing expenses of production.
(2) It helps in purchasing raw material and equipment.
(3) It helps in irrigation.
(4) It helps in completing production on time.
(5) It helps in storage of production.
(6) It helps in increasing his earnings.

Question: “Credit activities of the informal sector should be discouraged.” Support the statement with arguments.
Answer: Credit activities of the informal sector should be discouraged because
(1) This sector includes activities between money lenders, traders, employers, neighbours, relatives, etc. which are outside the control of the government.
(2) There is no organisation to supervise the lending activities of the informal sector.
(3) There are no fixed rules and regulations for this sector to follow.
(4) Informal lenders charge higher interest on the money they give to the borrowers as loan. Sometimes a substantial part of their hard-earned income is repaid as interest and the principal amount remains the same. Due to this, the borrowers always run with the risk of falling into a debt-trap.
(5) Sometimes these lenders impose very tough and unreasonable conditions on the borrowers, and they find no other option than to comply.

Question: “The credit activities of the informal sector should be discouraged.” Support the statement with arguments.
Answer: Credit activities of the informal sector should be discouraged: 
(i) Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers.
(ii) The poor households have to pay a large amount for borrowing.
(iii) 85% of the loans taken by poor households in the urban areas are from informal sources.
(iv) Cheap and affordable credit is crucial for the country’s development.
(v) Any other relevant point. (Any three points to be explained) 

Question: Explain any three loan activities of banks in India. 
Answer: Loan activities of Banks in India:
(i) Banks use the major portion of the deposits to extend loans.
(ii) Banks make use of the deposits to meet the loan requirements of the people.
(iii) Banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).
(iv) Banks charge a higher interest rate on loans than what it offers on deposits.
(v) Any other relevant point. (Any three points to be explained) 

Question: “Poor households still depend on informal sources of credit”. Support the statement with examples.
Answer: Poor households still depend on informal sources of credit because:
(i) Banks are not present everywhere in the rural areas.
(ii) Even when they are present, getting a loan from the bank is much more difficult than taking a loan from informal sources.
(iii) Mega banks or public sector banks require proper documents and collateral.
(iv) Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.
(v) Informal lenders such as moneylenders know the borrowers personally and they are willing to give a loan without collateral. 

Question: Describe the bad effects of informal sources of credit on borrowers.
Answer: Bad effects of informal sources of credit on borrowers:
(i) Higher interest rate.
(ii) Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
(iii) 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.
(iv) This could lead to increasing debt and debt trap.
(v) Any other relevant point.

Question: Why do lenders ask for collateral while lending? Explain.
Answer: A collateral is any physical or monetary asset like a building, vehicle, jewellery or cash deposits which a lender uses as a guarantee against the money he/she has lent to the borrower.
In case, a borrower fails to repay his/her loan, collateral can be used in turn to generate the amount the borrower owes.
Thus collateral becomes a legal guarantee that the borrower will repay the cash by all means. It encourages the lender to lend money without worrying about repayment.

Long Answer Type Questions

Question: How are deposits with the bank beneficial for individual as well as for the nation? Explain with examples. 
Answer: The deposits with banks are beneficial for the individual as well as for the nation:
(i) Banks accept deposit and also pay an amount as interest and in this way people earn money.
(ii) People’s money is safe with banks.
(iii) It is easy for individuals to get credit who have savings and current account in the banks.
(iv) Poor people who are engaged in production need credit.
(v) Credit provided by the banks for government projects helps in the development of the nation.
(vi) Banks provide loans for the promotion of International trade.
(vii) Development of infrastructure is undertaken with the loans provided by the banks.

Question: Why is cheap and affordable credit important for the country’s development? Explain any three reasons.
OR Why is credit a crucial element in the economic development?
OR
“Cheap and affordable credit is crucial for the country’s development.’’ Explain the statement with five points. 
Answer: Importance of cheap and affordable credit for the country’s development:
(i) Cheap and affordable credit would lead to higher income.
(ii) Many people could borrow for a variety of needs
(iii) It encourages people to invest in agriculture, do business and set up small scale industries etc.
(iv) It enables more investment which will lead to the acceleration of economic activities.
(v) Affordable credit would also end the cycle of the debt trap.
(vi) Any other relevant point. 

Question: Why is money transaction system better than barter system? Explain with examples.
Answer: (i) Transaction system is better than a barter system because the double coincidence of wants creates a problem.
(ii) For example, a shoe manufacturer wants to sell shoes in the market and wants to buy wheat. For this, he would look for a wheat growing farmer who would exchange his wheat with the shoes.
(iii) In a barter system, goods are exchanged without the use of money.
(iv) In contrast, in an economy where money is in use; money provides the crucial intermediate step. 

Question: “Credit sometimes pushes the borrower into a situation from which recovery is very painful.” Support the statement with examples.
Answer: It is true that credit sometimes pushes the borrower into a situation from which recovery is very painful. It happens in cases like:
(i) In case of rural area if crop fails due to natural factors, it will be difficult to repay.
(ii) In case of failure of a business it will be difficult to repay interest.
(iii) In situations with high risks, credit might create further problems for the borrower.
(iv) In the situation when borrower is unable to pay previous loan and he takes new loan.
(v) Loans taken by poor people from informal lenders sometimes, lead them to debt trap because of high interest rate.

Question: Describe the vital and positive role of credit with examples.
Answer: Credit plays a crucial role in a country’s development. By sanctioning loans to developing industries and trade, banks provide them with the necessary aid for improvement. This leads to increase in the production, profits and employment. However, caution must be exercised in the case of loans from the informal sector, which includes high interest rates that may be more harmful than good. For this reason, it is important that the formal sector gives out more loans so that borrowers are not duped by moneylenders, and can ultimately contribute to national development. For example: A loan given to a fresh post-graduate for setting up a business might contribute to employment generation and infrastructure development in the near future.

Question: ‘Poor households are still dependent on informal sources of credit.’ Why is it so? Give reasons.
Answer: Poor households are still dependent on informal sources of credit due to the following reasons:
(1) Banks are not present everywhere in rural India. Even when they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources.
(2) Bank loans require proper documents and collateral which poor people in rural India cannot produce to the bank.
(3) Informal lenders such as moneylenders know the borrowers personally and hence are often willing to give a loan without collateral.
(4) The borrowers can approach the moneylenders even without repaying their previous loans.
(5) Banks do not sanction any loan to the borrowers if they have not cleared the previous loans.

Question: Describe the vital and positive role of credit with examples.
OR What is credit? How does credit play a vital and positive role? Explain with an example.
Answer: ‘Credit’ refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.
Credit plays a vital and positive role as:
(i) Credit helps people from all walks of life in setting up their business, increase their income and support their families.
(ii) To some people, loan helps a lot in constructing their houses and get relief from monthly rent.
(iii) To others, it helps a lot in raising their standards of living.
(iv) Example of Salim, credit helps him and he is able to increase his earnings. 

Question: Describe any five informal sources of loans in India.
Answer: The informal sources of loan in India are:
(1) Moneylenders – They charge a high rate of interest, because of which many borrowers fall into a debt trap.
(2) Employers – Many people prefer taking loans from their boss or employer who cuts a fixed amount from their salary on monthly basis as repayment.
(3) Informal institutions – They give loans easily but are not authorised by the government. They charge a high rate of interest.
(4) Family and friends – They give loans easily but if a person is unable to repay then it causes distress in the relation.
(5) Big landlords – They charge a high rate of interest and also force small farmers who take loans from them to sell their produce at low prices to them, as they gave money to them when they needed.

Question: How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures.
Answer: Formal sector loans can be made beneficial for poor farmers and workers in the following ways:
(i) Create awareness to farmers about formal sector loans.
(ii) Process of providing loans should be made easier. It should be simple, fast and timely.
(iii) More number of Nationalized Banks/Cooperative Banks should be opened in the rural sector.
(iv) Banks and cooperatives should increase facility of providing loans so that dependence on informal sources of credit reduces.
(v) The benefits of loans should be extended to poor farmers and small scale industries.
(vi) While formal sector loans need to expand, it is also necessary that everyone receives these loans. 

Question: Self help groups help borrowers overcome the problem of the lack of collateral.” Examine the statement.
Answer: Following are the ways through with self help groups (SHGs) help borrowers overcome the problem of the lack of collateral:
(1) Self-help group is able to solve collateral problem. Members can take small loans from the group itself to meet their needs without any collateral.
(2) The Group charges interest on their loans but this is less than what the money lenders charge.
(3) Most of the decisions regarding savings and loan activities are taken by the group members. The group decides as regards the loans to be granted the purpose amount, interest to be charged, repayment schedule, etc. The group is responsible for the repayment of the loan. Any case of non-repayment of loan by any one member is followed up seriously by other members in the group.
(5) Because of these mentioned features, banks are willing to lend to poor women when organised in SHGs, keep as conclusion even though they have no collateral as such. Groups meet regularly and provide a platform to discuss and act on variety of social issues.