Class 10 Economics Chapter 3 Practice Question Answers - Understanding Economic Development

Q1: Why can one not refuse a payment made in rupees in India?
Ans: One cannot refuse a payment made in rupees in India because it is authorised by the government of India. It is accepted as a medium of exchange all over the country.

Q2: Why is the supervision of the functioning of formal sources of loans necessary?
Ans: It is necessary to supervise the functioning of formal sources of loans because the banks have to maintain a minimum cash balance out of the deposits they receive. They should also provide loans to small cultivators, mall scale industries etc.

Q3: Why are most of the poor households deprived from the formal sector of loans?
Ans: Most of the poor households are deprived from the formal sector of loans because they do not have the collateral to keep with the banks.

Q4: How do the deposits with the banks become their source of income?
Ans: Banks use a major portion of deposits to extend loans. They charge a higher rate of interest on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to the depositors is the main source of income for the banks.

Q5: Compare formal sector loans with informal sector loans regarding interest only.
Ans: In formal sector, the rate of interest is low. It is fixed by the Reserve Bank of India, who supervises the functioning of formal sources of loan. In informal sector, the rate of interest is very high as there is no organisation to supervise the functioning of informal sources of loan.

Q6: How can money be easily exchange for goods or services? Give an example to explain.
Ans: Transactions are made in money because a person holding money can easily exchange it for any commodity or a service. It solves the problem of double coincidence of wants by acting as a medium of exchange. For example, a shoe manufacturer wants to sell shoes in the market and wants to buy rice. Under barter system, both parties selling shoes and rice have to agree to buy and sell each other’s commodities and this creates a problem which is referred to as double coincidence of wants. This problem is overcome by the introduction of money. Now, the shoe manufacturer will sell the shoes for money and with that money he can buy rice.

Q7: “Cheap and affordable credit is crucial for the country’s development.” Assess the statement.
Ans: Cheap and affordable credit is crucial for a country’s development because:

• More lending would lead to higher incomes and encourage people to invest in agriculture, engage in business and set up small industries.
• Cheap credit will enable more investment. This leads to acceleration of economic activity.
• Cheap credit would also allow weaker sections of society to access formal sector of lending and get rid of from informal moneylenders.
•  Affordable credit would also end the cycle of debt trap.
•  Cheap and easy terms of credit would inspire better investment in technology and thus increase competition.

Q8: ‘Credit has its own unique role for development.’ Justify the statement with arguments.
Ans: Credit has a unique role in the economic development of the country. It is needed by all the three sectors of the economy.

• In urban sector, big businessmen and small manufacturers need loans either to expand their enterprises, bring new technology or diversifying their businesses.
•  In rural sector, the main demand for credit is for crop production. Crop production involves cost of seeds, fertilizers, pesticides, water, electricity, repair of equipments. Cheap credit would thus lead to increase in production.
• Even tertiary sector needs loans to buy the latest equipments and technology. Thus, we can say that credit has a unique role in the development of a country.

Q9: Describe the vital and positive role of credit with examples.
Ans: Credit plays a vital and positive role in the following ways:

• It helps people from all walks of life in setting up their business, increase their income and provide support to their family needs.
•  It makes it possible for the people to own or construct their own house and get relief from monthly rent.
• People often avail themselves of credit to purchase luxury items like vehicles, A.Cs, etc., which further raises their standard of living.
•  It enables us to invest in human resource. People take credit for education, training, etc. which allows enrichment of human resource.
• For example, Salim availed credit facility to meet the working capital needs of production. It helped him to meet the ongoing expenses of production, complete production on time, thereby, increasing his income.

Q10: How are deposits with the banks beneficial for individual as well as for the nation? Explain with examples.
Ans: Deposits with the banks are beneficial to the depositors as well as to the nation in various ways. Some of them are:

• They provide safe and secure deposits to a person’s money.
• They provide excellent saving and investment options and also help in the growth of the nation.
• They provide interests on the deposited money to the depositors.
• Money can be easily withdrawn from the banks as and when required by the depositors.
• They provide easy loans on nominal rates that make it possible for the common man to build their own assets.

Q11: How do banks play an important role in the economy of India? Explain
Ans: Banks play an important role in developing the economy of India by taking the following steps:

• Banks keep money of the people in safe custody to be used by the depositors in future.
• Banks also increase the savings of the depositors by paying interest on the money deposited.
• Banks mediate between people who have surplus and those who need money. This is done through granting loans. People avail themselves of these loan facilities to increase production and income.
•  Banks, being the formal source of credit, give loans at a very low rate of interest at flexible terms and conditions.
• Special provisions are made through banks for the upliftment of agriculture and industry like waiving of loans of the farmers.

Q12: How does money solves the problem of double coincidence of wants? Explain with an example.
Ans: In barter system, where goods are directly exchanged without the use of money, double coincidence of wants (i.e. a person desires to sell exactly what the other person wishes to buy) is an essential feature. But it, indeed, is a very cumbersome process. By serving as a medium of exchange, money removes the situation of double coincidence of wants and the difficulties associated with the barter system. For example, it is no longer necessary for a shoe manufacturer to* look for a farmer who will buy his shoes and at the same time sell him wheat. AH he has to do is to find a buyer for his shoes, who will exchange his money for shoes. Now, he can purchase wheat or any other good in the market with the help of the money earned. Thus, the problem of double coincidence of wants gets solved with the use of money.

Q13: Explain with an example how credit plays a vital and positive role for development.
Ans: Credit plays a vital and positive role in the following ways:

• It helps people from all walks of life in setting up their business, increase their income and provide support to their family needs.
• It makes it possible for the people to own or construct their own house and get relief from monthly rent.
• People often avail themselves of credit to purchase luxury items like vehicles, A.Cs, etc., which further raises their standard of living.
•  It enables us to invest in human resource. People take credit for education, training, etc. which allows enrichment of human resource.
• For example, Salim availed credit facility to meet the working capital needs of production. It helped him to meet the ongoing expenses of production, complete production on time, thereby, increasing his income.

Q14: Why is it necessary for banks and cooperatives to extend their lending activities in rural areas? Explain.
Ans: Banks and cooperatives should extend their lending activities in rural areas because:

• Rural poor and farmers have to borrow money from moneylenders at a very high rate of interest. Therefore, the cost to the borrowing is very high.
• A large part of the earnings of borrower is used to repay the loans. Hence, they have less income.
• Sometimes, a higher rate of lending means that the amount to be repaid is more than the earnings of the borrower.
• To save the people from the clutches and exploitation by the moneylenders, it is necessary for the banks and co-operatives to extend their lending activies.
• It would lead to higher incomes and improve the condition of the rural poor.
• People can also start a business or set up a small scale industry.

Q15: What is a collateral? Why do lenders ask for collateral while lending? Explain
Ans: A collateral is an asset such as land, building, livestock, vehicle or deposits with the banks that the borrower owns and uses this as a guarantee to the lender until the loan is repaid.

• The lenders ask for a collateral before lending because:
• It is an asset that the borrower owns and uses this as a guarantee to the lender – until the loan is repaid.
• Collateral with the lender acts as a proof that the borrower will return the money.
• By keeping a collateral with the lender, the borrower is bound to be regular in paying the interest because the borrower does not want to lose the collateral.

Q16: What are the two categories of sources of credit? Mention four features of each.
Ans: The two categories of sources of credit are:

• Formal sources of credit
• Informal sources of credit

The features of formal sources of credit are:

• They charge low rate of interest and the mode of repayment is easy.
• They keep a collateral from the borrowers for granting loans.
• Reserve Bank of India supervises the functioning of formal sources of credit, (id) Urban households are largely depend on formal sources of credit.
• They include banks and cooperatives.

The features of informal sources of credit are:

• They charge higher rate of interest and the mode of repayment is very harsh.
• There is no need to keep a collateral in informal sources of credit.
•  There is no organisation to supervise the functioning of informal sources of credit.
• Poor households are largely depend on informal sources of credit.
• They include moneylenders, relatives, friends etc.

Q17: Why is cheap and affordable credit important for the country’s development? Explain any three reasons.
Ans: Cheap and affordable credit is crucial for a country’s development because:

• More lending would lead to higher incomes and encourage people to invest in agriculture, engage in business and set up small industries.
•  Cheap credit will enable more investment. This leads to acceleration of economic activity.
• Cheap credit would also allow weaker sections of society to access formal sector of lending and get rid of from informal moneylenders.
• Affordable credit would also end the cycle of debt trap.
• Cheap and easy terms of credit would inspire better investment in technology and thus increase competition.

Q18: “Whether credit will be useful or not, depends upon the situation.” Give two different examples in support of this statement.
Ans: The two examples showing whether credit will be useful or not, depends upon the situation are:

• Chirag is a shoe manufacturer. During the festival season, he receives an order for 3,000 pair of shoes to be completed in a month. He employs two more workers for pasting and stitching. He takes an advance payment from a large trader for 1,000 pair of shoes. He asks the leather supplier to supply leather and payment would be made later. Chirag completes the order in a month, makes a good profit and repay all the money that he had borrowed.
• Sapna, a small farmer, grows groundnut in her three acres of land. She took a loan from the moneylender, hoping to repay the loan, once the crop is harvested. Being hit by the pest, the crop fails. Expensive pesticides did not make any difference. Sapna is unable to repay the moneylender and the other year, it becomes a bigger amount. Next year again, she took a loan for cultivation. It is not a bumber crop this year too. Sapna earns little, but it is not enough to repay the old loans. She had to sell a part of the land to repay the loan. She is caught in a debt. This situation is called debt-trap.
• Hence, we can say that it depends on situation whether credit will be useful or not.

Q19: How do SHGs help borrowers to overcome the problem of lack of collateral? Explain with an example.
Ans: SHGs help borrowers to overcome the problem of lack of collateral in the following ways:

• It is the group that is responsible for the repayment of loan.
• Any case of non-payment of loan by any member is followed up seriously by other members.
• The formal sector is willing to lend to the members of SHGs because of their good track record of managing the credit.

Q20: Which government body supervises the functioning of formal sources of loans in India? Explain its functioning.
Ans: Reserve Bank of India supervises the functioning of formal sources of loans in India.

• It issues currency notes on behalf of the central government.
• It issues guidelines for fixing rate of interest on deposits and lending by banks. ,,
•  It ensures that banks should maintain a minimum cash balance out of the deposits they receive.
•  It ensures that the banks should give loans not only to profit making businesses but also to poor people and small traders.
•  Periodically, the banks have to submit a report to the RBI on how much they are lending, to whom and at what interest rate.

Q21: How does the use of money make exchange of things easier? Explain with examples.
Ans: Money is used as a medium of exchange because it serves as a common medium through which people can carry out buying and selling. Use of money makes economic activities independent of each other. At the same time, it removes the inconvenience caused by the barter system. For example, a person wants to sell sugar and buy wheat. He has to look for a person who wants sugar and has wheat to sell. In contrast, if in an economy, where money is used, the person who wants to sell sugar only has to look for a buyer for his sugar. The money which he will get can be used to purchase the wheat or any other commodity in the market. Since, money is used in the exchange process it is called a medium of exchange. Let us take an example of a farmer who wants to sell wheat and wants to buy goat in lieu of that. If he opts for barter system, he will have to search a person who may be interested in giving off his goat and in taking wheat. But finding such a person can be difficult and time-consuming. On the other hand, if the farmer sells wheat and takes money for that, he can easily go and purchase goat with that money.

Q22:  How does credit plays a vital and positive role? Explain with suitable example.
Ans: Credit plays a vital and positive role in the following ways:

• It helps people from all walks of life in setting up their business, increase their income and provide support to their family needs.
• It makes it possible for the people to own or construct their own house and get relief from monthly rent.
• People often avail themselves of credit to purchase luxury items like vehicles, A.Cs, etc., which further raises their standard of living.
• It enables us to invest in human resource. People take credit for education, training, etc. which allows enrichment of human resource.
• For example, Salim availed credit facility to meet the working capital needs of production. It helped him to meet the ongoing expenses of production, complete production on time, thereby, increasing his income.

Q23: When does credit push the borrower into a debt-trap? Explain with the help of an example.
Ans: In situation with high risks, credit might create problems and pushes the borrower into a debt-trap. He is much worse off than before. For example, crop production involves high costs on inputs such as fertilizers, pesticides, water etc. Farmers generally take loans at the beginning of the season and repay the loan after harvest. But the failure of the crop makes loan repayment impossible. They have to sell part of the land to repay the loan or a fresh loan may be required to repay the previous loan, and the borrower may find himself caught in a vicious circle and recovery from such a situation is very painful.