In earlier times, people exchanged goods and services through the barter system, where goods were directly exchanged for other goods. However, barter transactions were difficult because they required a double coincidence of wants—both parties had to want what the other offered. With the introduction of money, trade became easier, as money serves as a medium of exchange and eliminates the need for a direct exchange of goods.
i. What is meant by the "double coincidence of wants" in a barter system? (1 mark)
ii. How does money solve the problem of double coincidence of wants? (1 mark)
iii. Give an example of a situation where a barter system would be difficult to use. (2 marks)
Ans:
i. Double coincidence of wants means that both parties in a barter exchange must want what the other is offering at the same time.
ii. Money solves this problem by acting as a common medium of exchange, allowing people to buy and sell goods independently.
iii. Example: A farmer wants to exchange wheat for clothes, but the tailor does not need wheat and instead wants milk. Since the farmer does not produce milk, the barter system becomes inefficient, as it is difficult to find someone who wants wheat and has clothes to offer in return. This highlights the limitations of the barter system.
In modern economies, money exists in different forms, including currency (paper notes and coins) and demand deposits in banks. People deposit their extra cash in banks, where it is kept safe and earns interest. They can withdraw money when needed or use cheques and digital transactions to make payments. This system helps reduce the reliance on cash.
i. What are the modern forms of money? (1 mark)
ii. How do bank deposits act as a form of money? (1 mark)
iii. Explain one advantage of digital transactions over cash payments. (2 marks)
Ans:
i. Modern forms of money include currency (paper notes and coins) and demand deposits in banks.
ii. Bank deposits act as money because they can be withdrawn or used to make payments through cheques and electronic transfers, just like cash.
iii. One advantage of digital transactions over cash payments is security —digital transactions reduce the risk of theft or loss associated with carrying physical cash. Additionally, digital transactions leave a record, making it easier to track expenses and resolve disputes.
Banks play a key role in the economy by accepting deposits and providing loans. They keep a small portion of deposits as cash and lend the rest to businesses and individuals. This helps in economic growth. Banks charge a higher interest rate on loans than what they pay on deposits, and the difference is their main source of income.
i. Why do banks keep only a small portion of deposits as cash? (1 mark)
ii. How do banks generate income from loans? (1 mark)
iii. Why is it important for banks to lend money to different sectors of the economy? (2 marks)
Ans:
i. Banks keep only a small portion of deposits as cash to meet withdrawal demands, while the rest is used for lending.
ii. Banks generate income by charging a higher interest rate on loans than the interest they pay on deposits.
iii. Lending money to different sectors is important because it provides funds for businesses to expand, invest, and innovate, leading to job creation and increased productivity. This, in turn, promotes overall economic growth and development while ensuring that various sectors of the economy have access to necessary financial resources.
Credit plays a crucial role in the economy. In some cases, credit helps people increase their earnings and improve their financial condition, such as when a business takes a loan to expand and earns a profit. However, credit can also lead to a debt trap, especially when borrowers fail to repay their loans due to unforeseen circumstances like crop failure or business loss.
i. How can credit be beneficial for a borrower? (1 mark)
ii. What is a debt trap? (1 mark)
iii. Give an example of a situation where credit can have a negative impact. (2 marks)
Ans:
i. Credit is beneficial when it helps borrowers invest in productive activities and earn profits, such as a farmer taking a loan for better seeds and fertilizers.
ii. A debt trap occurs when a borrower is unable to repay a loan and has to take new loans, leading to increasing debt.
iii. Example: A farmer takes a loan for crop production, but due to unforeseen circumstances like drought or floods, the crop fails. With no income to repay the loan, the farmer is forced to borrow more money, leading to a debt trap where the debt keeps growing, making it nearly impossible to recover financially.
Credit in India is available from formal sources (banks and cooperatives) and informal sources (moneylenders, traders, and relatives). Formal lenders charge lower interest rates and are regulated by the Reserve Bank of India (RBI). In contrast, informal lenders charge very high interest rates, often leading to financial difficulties for borrowers.
i. What is the difference between formal and informal sources of credit? (1 mark)
ii. Why is borrowing from informal sources risky? (1 mark)
iii. How can the government encourage people to borrow from formal sources? (2 marks)
Ans:
i. Formal sources of credit include banks and cooperatives, which follow government regulations, while informal sources include moneylenders and traders, who operate without regulation.
ii. Borrowing from informal sources is risky because they charge very high interest rates and can exploit borrowers through unfair lending practices.
iii. The government can encourage borrowing from formal sources by:
Money serves multiple functions in an economy. It is used as a medium of exchange, allowing people to buy goods and services without barter. It is also a store of value, meaning people can save it for future use. Additionally, money acts as a unit of account, enabling easy comparison of prices. Without money, trade and economic activities would be difficult to manage.
i. What is the primary function of money in an economy? (1 mark)
ii. How does money serve as a store of value? (1 mark)
iii. Why is money considered a better unit of account compared to the barter system? (2 marks)
Ans:
i. The primary function of money is to act as a medium of exchange, facilitating trade and transactions.
ii. Money serves as a store of value because people can save it and use it later without losing its worth, unlike perishable goods.
iii. Money is considered a better unit of account compared to the barter system because it provides a standardized measure for comparing the value of goods and services. In the barter system, determining the relative value of goods (e.g., how many apples equal a sack of wheat) is complex and subjective, making transactions inefficient. Money simplifies this process by assigning clear monetary values to goods and services.
The Reserve Bank of India (RBI) is the central authority responsible for controlling the supply of money in the economy. It regulates banking activities, monitors inflation, and sets interest rates to ensure economic stability. The RBI also ensures that banks maintain sufficient cash reserves and prevents financial crises by overseeing their lending activities.
i. What is the primary role of the Reserve Bank of India? (1 mark)
ii. How does the RBI control the money supply in the economy? (1 mark)
iii. Why is it important for the RBI to regulate banks? (2 marks)
Ans:
i. The primary role of the RBI is to regulate the money supply, control inflation, and oversee banking operations in India.
ii. The RBI controls the money supply by adjusting interest rates, setting cash reserve requirements, and regulating credit availability.
iii. It is important for the RBI to regulate banks to prevent financial instability, such as bank failures or crises, and to protect depositors' money by ensuring banks follow safe and responsible lending practices. Regulation also helps maintain public confidence in the banking system and promotes sustainable economic growth.
Farmers and small businesses in rural areas often require credit for buying seeds, fertilizers, and equipment. Formal credit from banks and cooperatives helps them invest in better agricultural practices, leading to higher productivity. However, many rural borrowers still depend on moneylenders, who charge very high interest rates, making it difficult for them to repay loans.
i. Why do farmers need credit? (1 mark)
ii. How do banks and cooperatives help rural borrowers? (1 mark)
iii. Suggest two measures to reduce farmers’ dependence on moneylenders. (2 marks)
Ans:
i. Farmers need credit to buy seeds, fertilizers, irrigation facilities, and modern equipment for better agricultural productivity.
ii. Banks and cooperatives help rural borrowers by providing loans at lower interest rates and offering repayment flexibility compared to moneylenders.
iii. Two measures to reduce farmers’ dependence on moneylenders are:
In many rural areas, Self-Help Groups (SHGs) have become an important source of credit for small borrowers, especially women. SHGs pool money from their members and provide small loans at low-interest rates. This helps members start small businesses, improve their income, and become financially independent. The government and banks support SHGs as a means to promote self-reliance and rural development.
i. What is the main purpose of Self-Help Groups (SHGs)? (1 mark)
ii. How do SHGs benefit women in rural areas? (1 mark)
iii. Suggest two ways in which the government can strengthen SHGs. (2 marks)
Ans:
i. The main purpose of SHGs is to provide small loans and financial assistance to poor individuals, especially in rural areas.
ii. SHGs benefit women by helping them start small businesses, improve household income, and become financially independent.
iii. Two ways to strengthen Self-Help Groups (SHGs) are:
With the rise of digital banking, financial transactions have become faster and easier. People can now transfer money, pay bills, and access loans online without visiting a bank. Digital banking has also improved financial inclusion, allowing even those in remote areas to open bank accounts and use banking services. However, challenges like lack of internet access and digital literacy remain obstacles.
i. How has digital banking made financial transactions easier? (1 mark)
ii. Why is financial inclusion important for economic growth? (1 mark)
iii. Suggest two ways to improve access to digital banking in rural areas. (2 marks)
Ans:
i. Digital banking has made transactions easier by allowing people to transfer money, pay bills, and access loans without visiting a bank branch.
ii. Financial inclusion is important because it helps people access credit, save money safely, and participate in the formal economy, leading to economic growth.
iii. Two ways to improve digital banking access:
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