CHAPTER- MONEY AND CREDIT
TERM II
Q1 Define the term ‘money’.
A- Money can be defined as anything which is generally accepted by the people in
exchange of goods and services or in repayment of debts. 1
Q2 What is meant by ‘double coincidence of wants’?
A- Simultaneous fulfillment of mutual wants by buyers and sellers is known as double
coincidence of wants. 1
Q3 How money serves as a medium of exchange?
A-People exchange goods and services through the medium of money. A person holding
money can easily exchange it for any commodity or service that he might want . 1
Q4 Why are demand deposits considered as money?
A- Demand deposits are payable on demand. They also provide the facility of medium of
exchange which is a function of money, when payments are made by cheques. 1
Q5 What is meant by barter system?
A-It implies direct exchange of goods against goods without the use of money. 1
Q6 How does money solves the problem of double coincidence of wants? Explain with
an example of your own.
A-Money solves the problem of double coincidence of wants by acting as a medium of
exchange. If a shoe manufacturer wants to sell shoes in a market and buy rice under
barter exchange, both parties selling shoes and rice have to agree to sell and buy each
others commodities and this creates a problem called double coincidence of wants. This
problem is solved by money. Here the shoe manufacturer will first exchange shoes for
money and then exchange the money for rice. 3
Q7 How do banks mediate between those who have surplus money and those who need
money?
A- Banks accept money from the public and use it to provide loans and advances to them.
Banks pay interest from whom it borrows. After keeping a portion of deposits as reserves,
banks lend money to people and charges interest from them. Banks charge a higher
interest rate on loans than what they offer on deposits. The difference between the two is
their main source of income. 3
Q8 What is the basic idea behind the SHGs for the poor? Expain in your own words. A-SHGs helps in pooling the savings of the members, who are poor people. Members
can get timely loans for a variety of purposes and at a reasonable rate of interest. It helps
borrowers to overcome the problem of lack of collateral. 3
Q9 Distinguish between formal and informal sources of credit. 3
A-
Formal credit Informal credit
1. It includes loans from banks and
cooperatives
It includes loans from traders,
moneylenders, relatives, friendsetc.
2. RBI supervises their functions of giving
loans.
No organization is there to supervise its
lending activities.
3. It charges lower rate of interest It charges high rate of interest.
Q10 What does terms of credit include? 3
A- While giving loans, the lender specifies certain terms and conditions relating to the
loan to be followed by the borrower which is known as terms of credit. It includes
interest rate, collateral and documentation required and the mode of repayment etc.
Q11 Explain “loans from cooperatives”? 3
A- Cooperatives accept deposits from its members which becomes the basis (collateral)
to obtain huge loan from the banks. These amounts are used to provide loans to members
for purposes such as purchase of agricultural implements, loans for cultivation,
construction of houses etc. Another round of lending can take place after existing loans
are repaid. Examples are farmers cooperatives, weaver cooperatives etc.
Q12 The modern currency is without any use of its own as a commodity. Why is it
accepted as money? 3
A- Modern currency is without any use of its own as it is not made of precious metals
such as gold, silver and copper and unlike grain and cattle it is not of daily use. But still it
is accepted by all as a medium of exchange because the currency is authorized by the
govt. of the country. Everybody is bound to accept it.
Q13 What are demand deposits? Describe any three salient features of demand deposits.4
A- Deposits in the bank accounts which are payable on demand are called demand
deposits. Their features are:
a) People have the provision to withdraw the money as and when they require.
b) Interest is paid by the bank on these dposits ( If they are saving account deposits and
not current accounts).
c) Bank allows the owner of demand deposits to make out a cheque for a specific amount.
Q14Why are transactions made in money? Explain with suitable examples. 4
A- Because a person holding money can easily exchange it for any commodity or service
that he or she might want. For example Money solves the problem of double coincidence
of wants by acting as a medium of exchange. If a shoe manufacturer wants to sell shoes
in a market and buy rice under barter exchange, both parties selling shoes and rice have
to agree to sell and buy each others commodities and this creates a problem called double coincidence of wants. This problem is solved by money. Here the shoe manufacturer will
first exchange shoes for money and then exchange the money for rice.
Q15 Which are the two major sources of formal sector credit in India? Why do we need
to expand formal sources of credit in India? 4
A- Sources of formal sector credit are loans from banks and cooperatives. We need to
expand formal sources because of the following reasons:
a) To save people and especially poor farmers and workers from the exploitation of
informal sector which charges a higher interest on loans. A large part of earnings
of the borrower is used to repay the loan causing them to fall in debt trap.
b) Formal sector lends at a reasonable rate of interest which is very cheap as
compared to informal credit. It thus provides cheap and affordable credit.
c) 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.
TERM II
Q1 Define the term ‘money’.
A- Money can be defined as anything which is generally accepted by the people in
exchange of goods and services or in repayment of debts. 1
Q2 What is meant by ‘double coincidence of wants’?
A- Simultaneous fulfillment of mutual wants by buyers and sellers is known as double
coincidence of wants. 1
Q3 How money serves as a medium of exchange?
A-People exchange goods and services through the medium of money. A person holding
money can easily exchange it for any commodity or service that he might want . 1
Q4 Why are demand deposits considered as money?
A- Demand deposits are payable on demand. They also provide the facility of medium of
exchange which is a function of money, when payments are made by cheques. 1
Q5 What is meant by barter system?
A-It implies direct exchange of goods against goods without the use of money. 1
Q6 How does money solves the problem of double coincidence of wants? Explain with
an example of your own.
A-Money solves the problem of double coincidence of wants by acting as a medium of
exchange. If a shoe manufacturer wants to sell shoes in a market and buy rice under
barter exchange, both parties selling shoes and rice have to agree to sell and buy each
others commodities and this creates a problem called double coincidence of wants. This
problem is solved by money. Here the shoe manufacturer will first exchange shoes for
money and then exchange the money for rice. 3
Q7 How do banks mediate between those who have surplus money and those who need
money?
A- Banks accept money from the public and use it to provide loans and advances to them.
Banks pay interest from whom it borrows. After keeping a portion of deposits as reserves,
banks lend money to people and charges interest from them. Banks charge a higher
interest rate on loans than what they offer on deposits. The difference between the two is
their main source of income. 3
Q8 What is the basic idea behind the SHGs for the poor? Expain in your own words. A-SHGs helps in pooling the savings of the members, who are poor people. Members
can get timely loans for a variety of purposes and at a reasonable rate of interest. It helps
borrowers to overcome the problem of lack of collateral. 3
Q9 Distinguish between formal and informal sources of credit. 3
A-
Formal credit Informal credit
1. It includes loans from banks and
cooperatives
It includes loans from traders,
moneylenders, relatives, friendsetc.
2. RBI supervises their functions of giving
loans.
No organization is there to supervise its
lending activities.
3. It charges lower rate of interest It charges high rate of interest.
Q10 What does terms of credit include? 3
A- While giving loans, the lender specifies certain terms and conditions relating to the
loan to be followed by the borrower which is known as terms of credit. It includes
interest rate, collateral and documentation required and the mode of repayment etc.
Q11 Explain “loans from cooperatives”? 3
A- Cooperatives accept deposits from its members which becomes the basis (collateral)
to obtain huge loan from the banks. These amounts are used to provide loans to members
for purposes such as purchase of agricultural implements, loans for cultivation,
construction of houses etc. Another round of lending can take place after existing loans
are repaid. Examples are farmers cooperatives, weaver cooperatives etc.
Q12 The modern currency is without any use of its own as a commodity. Why is it
accepted as money? 3
A- Modern currency is without any use of its own as it is not made of precious metals
such as gold, silver and copper and unlike grain and cattle it is not of daily use. But still it
is accepted by all as a medium of exchange because the currency is authorized by the
govt. of the country. Everybody is bound to accept it.
Q13 What are demand deposits? Describe any three salient features of demand deposits.4
A- Deposits in the bank accounts which are payable on demand are called demand
deposits. Their features are:
a) People have the provision to withdraw the money as and when they require.
b) Interest is paid by the bank on these dposits ( If they are saving account deposits and
not current accounts).
c) Bank allows the owner of demand deposits to make out a cheque for a specific amount.
Q14Why are transactions made in money? Explain with suitable examples. 4
A- Because a person holding money can easily exchange it for any commodity or service
that he or she might want. For example Money solves the problem of double coincidence
of wants by acting as a medium of exchange. If a shoe manufacturer wants to sell shoes
in a market and buy rice under barter exchange, both parties selling shoes and rice have
to agree to sell and buy each others commodities and this creates a problem called double coincidence of wants. This problem is solved by money. Here the shoe manufacturer will
first exchange shoes for money and then exchange the money for rice.
Q15 Which are the two major sources of formal sector credit in India? Why do we need
to expand formal sources of credit in India? 4
A- Sources of formal sector credit are loans from banks and cooperatives. We need to
expand formal sources because of the following reasons:
a) To save people and especially poor farmers and workers from the exploitation of
informal sector which charges a higher interest on loans. A large part of earnings
of the borrower is used to repay the loan causing them to fall in debt trap.
b) Formal sector lends at a reasonable rate of interest which is very cheap as
compared to informal credit. It thus provides cheap and affordable credit.
c) 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.
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