Extra 20 long-answer questions and answers (with 5-6 points each) from Chapter: Money and Credit of Class 10 CBSE Economics:
1-10: Money and Its Functions
1. What is money? Explain its various functions.
Ans: Money is a medium of exchange that is widely accepted for goods and services. It overcomes the limitations of the barter system.
Functions of Money:
Medium of Exchange:
Used for buying and selling goods and services.
Measure of Value:
Helps in determining the price of goods and services.
Store of Value:
Can be saved for future use without losing value.
Standard of Deferred Payment:
Used for future payments, such as loans and
installments
.
Liquidity:
Easily convertible into other forms of wealth.
Widely Accepted:
People trust its value for transactions.
2. Why did the barter system fail? How does money solve its problems?
Ans: The barter system involved exchanging goods for goods but had many limitations.
Limitations of the Barter System:
Double Coincidence of Wants:
Both parties must want each other’s goods.
Lack of Common Measure of Value:
No standard pricing for goods.
Difficulty in Storing Wealth:
Goods like food perish over time.
Problem in Deferred Payments:
Future transactions were difficult.
Lack of Divisibility:
Some goods couldn’t be divided into smaller units.
Difficulty in Transporting Goods:
Heavy or bulky goods were hard to exchange.
How Money Solves These Problems:
Acts as a universal medium of exchange.
Standard measure of value is established.
Can be stored without loss of value.
Enables easy future payments.
3. What are the advantages of modern currency over earlier forms of money?
Ans: Modern currency includes paper notes and coins issued by the government.
Advantages of Modern Currency:
Easily Portable:
Lightweight and convenient to carry.
Widely Accepted:
Legal tender backed by the government.
Durable:
Does not perish like goods used in the barter system.
Divisible:
Can be broken into smaller units (₹500, ₹100, ₹50, etc.).
Secure and Standardized:
Cannot be easily counterfeited due to RBI control.
Facilitates Credit Transactions:
Used in banking and digital payments.
4. Explain the role of the Reserve Bank of India (RBI) in money circulation.
Ans: The RBI is India’s central bank responsible for regulating money supply.
Role of RBI:
Issuing Currency:
RBI has the sole right to issue currency notes.
Controlling Inflation:
Regulates money supply to control price rise.
Supervising Banks:
Ensures banks follow financial rules and regulations.
Managing Foreign Exchange:
Controls foreign currency reserves.
Lender of Last Resort:
Provides financial aid to banks in crisis.
Monetary Policy Implementation:
Uses tools like repo rate and cash reserve ratio (CRR) to manage the economy.
11-20: Credit, Banking, and Its Impact
5. What is credit? How does it help in economic development?
Ans: Credit refers to a loan given by a lender to a borrower with an agreement to repay later.
Role of Credit in Economic Development:
Business Expansion:
Entrepreneurs use credit to invest in industries and create jobs.
Agricultural Growth:
Farmers take loans for buying seeds, fertilizers, and equipment.
Infrastructure Development:
Credit helps in building roads, bridges, and electricity projects.
Increase in Production:
Helps producers buy machinery and raw materials.
Improvement in Living Standards:
People can buy homes, vehicles, and essential goods.
Encourages Entrepreneurship:
Small businesses grow with easy access to credit.
6. What is the difference between formal and informal sources of credit?
Ans:
|
Feature |
Formal Credit |
Informal Credit |
|---|---|---|
|
Source |
Banks, cooperatives |
Moneylenders, traders, relatives |
|
Regulation |
Regulated by RBI |
Not regulated |
|
Interest Rate |
Low and fixed |
High and variable |
|
Documentation |
Requires proper documents |
No paperwork needed |
|
Security |
Loans are secured (collateral) |
Can be unsecured |
|
Example |
SBI, NABARD, Cooperative Banks |
Local moneylenders, shopkeepers |
7. Why do poor people rely more on informal credit sources?
Ans: Poor people depend on informal credit due to:
Lack of Collateral:
Banks require security, but moneylenders do not.
Easy Availability:
Quick loans without paperwork.
No Bank Access:
Rural areas have fewer formal banking facilities.
Flexible Repayment Terms:
Informal lenders offer customized repayment schedules.
Immediate Needs:
Formal loans take time to process, while informal sources lend instantly.
Lack of Awareness:
Poor people may not know about bank loans or government schemes.
8. What is collateral? Why is it required for loans?
Ans: Collateral is an asset that a borrower offers as security for a loan.
Importance of Collateral:
Reduces Risk for Lenders:
Ensures loan repayment.
Encourages Responsible Borrowing:
Borrowers are more likely to repay if they risk losing an asset.
Helps Obtain Larger Loans:
Banks offer bigger loans if collateral is provided.
Boosts Creditworthiness:
Borrowers with collateral get loans at lower interest rates.
Can Be Confiscated in Case of Default:
Lenders can recover losses by selling the collateral.
Examples of Collateral:
Land, gold, house, fixed deposits.
9. How do Self-Help Groups (SHGs) help in credit facilities?
Ans: SHGs are small groups of people who save and lend money among themselves.
Role of SHGs in Credit:
Encourage Savings:
Members contribute small amounts regularly.
Provide Low-Interest Loans:
Members can borrow at affordable rates.
Reduce Dependence on Moneylenders:
Poor people get loans without high interest.
Promote Women Empowerment:
Many SHGs are run by women for financial independence.
Help in Government Schemes:
SHGs can get bank loans and government support.
Develop Rural Economy:
Provide financial stability in villages.
10. How does the credit system sometimes lead to a debt trap?
Ans: A debt trap occurs when a borrower is unable to repay a loan and has to take another loan.
Causes of Debt Trap:
High-Interest Rates:
Moneylenders charge excessive interest, making repayment difficult.
Failure in Investments:
Farmers or businesses may face losses, making loan repayment hard.
Cycle of Borrowing:
Borrowers take new loans to pay old debts, increasing burden.
Unemployment or Illness:
Unexpected expenses make it difficult to repay loans.
Lack of Financial Literacy:
Borrowers may not understand repayment conditions.
Seizure of Collateral:
If the borrower defaults, lenders take their property or land.
11. What are the benefits of taking loans from formal sources of credit?
Ans: Formal sources of credit, such as banks and cooperatives, offer several benefits:
Lower Interest Rates:
Compared to moneylenders, formal loans have regulated and lower interest rates.
Government Regulation:
Banks follow RBI guidelines, ensuring fair lending practices.
Fixed Repayment Terms:
Loans have structured repayment schedules, making it easier for borrowers.
No Exploitation:
Unlike moneylenders, banks do not use unfair means to recover money.
Encourages Productive Use:
Formal loans are often used for business, farming, and education.
Boosts Economic Growth:
Helps industries, businesses, and individuals improve their financial status.
12. How do banks play an important role in economic development?
Ans: Banks contribute significantly to a country’s economy in the following ways:
Mobilizing Savings:
Banks encourage people to save money and keep it secure.
Providing Credit:
Loans help businesses, industries, and individuals invest in economic activities.
Supporting Agriculture and Rural Development:
Special loans for farmers improve agricultural output.
Facilitating Trade and Commerce:
Banks provide business loans, working capital, and foreign exchange services.
Creating Employment Opportunities:
By financing businesses, banks help generate jobs.
Regulating Money Supply:
Banks, under RBI supervision, control inflation and financial stability.
13. How do Self-Help Groups (SHGs) improve financial inclusion?
Ans: SHGs help rural and poor communities access credit without collateral.
Easy Access to Credit:
Members contribute small savings and lend among themselves.
Low-Interest Loans:
SHGs offer loans at much lower interest rates than moneylenders.
Women Empowerment:
Many SHGs are run by women, helping them gain financial independence.
Encourages Savings Habit:
SHG members regularly save money, improving financial stability.
Link with Banks:
SHGs can take collective loans from banks, improving financial inclusion.
Support for Small Businesses:
Helps members start small-scale businesses like tailoring, handicrafts, and dairy farming.
14. What are the different types of loans provided by banks?
Ans: Banks provide different types of loans for various purposes:
Personal Loans:
Given to individuals for expenses like medical treatment, travel, and marriage.
Home Loans:
Loans to purchase or build houses, usually repaid over 10-30 years.
Education Loans:
Given to students for higher studies, often at lower interest rates.
Agricultural Loans:
Provided to farmers for buying seeds, fertilizers, and equipment.
Business Loans:
Given to entrepreneurs for starting or expanding businesses.
Vehicle Loans:
Used for purchasing cars, bikes, or commercial vehicles.
15. What steps can the government take to improve credit facilities in rural areas?
Ans: The government can take several measures to improve rural credit:
Expanding Rural Banks:
More bank branches in villages to reduce dependence on moneylenders.
Promoting SHGs and Cooperatives:
Encouraging group-based lending to improve accessibility.
Providing Low-Interest Loans:
Offering special schemes for farmers and small businesses.
Financial Literacy Programs:
Educating people on banking services and avoiding debt traps.
Digitizing Transactions:
Encouraging mobile banking and digital payments in rural areas.
Government Loan Guarantees:
Ensuring small borrowers can access credit without collateral.
16. How does credit help in rural development?
Ans: Credit plays a crucial role in improving the rural economy:
Investment in Agriculture:
Farmers take loans to buy better seeds, fertilizers, and irrigation facilities.
Improving Rural Infrastructure:
Loans help in building roads, storage facilities, and irrigation projects.
Encouraging Small-Scale Industries:
Rural credit supports handicrafts, dairy farming, and small businesses.
Reducing Dependence on Moneylenders:
Easier access to formal credit prevents exploitation.
Rural Employment Generation:
Loans help in setting up small industries, increasing job opportunities.
Improving Standard of Living:
Farmers and workers can improve their homes, education, and healthcare.
17. What is the role of NABARD in rural banking and credit?
Ans: NABARD (National Bank for Agriculture and Rural Development) supports rural banking.
Provides Loans to Rural Banks:
Helps regional rural banks and cooperative banks provide credit to farmers.
Develops Agricultural Credit:
Ensures farmers get affordable credit for farming activities.
Supports Rural Infrastructure:
Funds projects like irrigation, roads, and warehousing.
Encourages Self-Help Groups:
Promotes SHGs to provide easy loans to the rural poor.
Regulates Cooperative Banks:
Ensures proper functioning of rural financial institutions.
Promotes Financial Inclusion:
Helps in bringing banking services to remote villages.
18. What measures can be taken to control debt traps in rural areas?
Ans: Debt traps occur when borrowers cannot repay loans and take more debt to cover old loans.
Ways to Control Debt Traps:
Providing Low-Interest Loans:
Government banks should offer affordable credit options.
Expanding Formal Credit Institutions:
More banks and cooperatives in rural areas.
Financial Awareness Programs:
Educating farmers and small business owners on managing loans.
Encouraging Self-Help Groups:
SHGs help borrowers avoid moneylenders.
Regulating Moneylenders:
Government should control high-interest informal lending.
Loan Waivers and Subsidies:
Government schemes can provide relief in times of crisis.
19. How does RBI control credit creation by banks?
Ans: The Reserve Bank of India (RBI) uses monetary policies to regulate credit in the economy.
Cash Reserve Ratio (CRR):
RBI requires banks to keep a portion of deposits as reserves, controlling the amount they can lend.
Statutory Liquidity Ratio (SLR):
Banks must keep a certain percentage of deposits in government securities.
Repo Rate:
The interest rate at which RBI lends money to banks; higher rates reduce credit availability.
Reverse Repo Rate:
The rate at which banks deposit money with RBI; higher rates encourage banks to keep more money with RBI.
Open Market Operations:
RBI buys and sells government securities to control money supply.
Moral Suasion:
RBI advises banks to follow responsible lending practices.
20. How can digital banking improve access to credit in India?
Ans: Digital banking provides convenient financial services using technology.
Easy Online Loans:
Borrowers can apply for loans through mobile banking apps.
Faster Loan Processing:
Digital verification speeds up approvals.
Financial Inclusion:
Digital payments and credit access reach rural areas.
Lower Banking Costs:
Reduces paperwork and administrative expenses.
Secure Transactions:
Online banking ensures safety through authentication.
Encourages Cashless Economy:
Digital payments promote transparency and reduce corruption.
