Unit Test (Solutions): Money and Credit

Time: 1 hour 
M.M.: 30
Instructions: Attempt all questions.
 Question numbers 1 to 5 carry 1 mark each.
 Question numbers 6 to 8 carry 2 marks each.
 Question numbers 9 to 11 carry 3 marks each.
 Question numbers 12 & 13 carry 5 marks each.

Q1. Which of the following is a function of money? (1 Mark)

a) Source of entertainment
b) Medium of exchange
c) Symbol of culture
d) Unit of inheritance

Ans: (b)

Explanation: Money serves as a medium of exchange by allowing people to buy and sell goods and services without resorting to barter. This removes the need for a double coincidence of wants, so trade becomes easier and more efficient.

Q2. Who issues currency notes on behalf of the central government in India? (1 Mark)

a) State Bank of India
b) Finance Ministry
c) Reserve Bank of India
d) Planning Commission

Ans: (c)

Explanation: The Reserve Bank of India is the authorised institution that issues currency notes on behalf of the central government and manages the integrity and supply of currency in the economy.

Q3. What is the major drawback of the barter system? (1 Mark)

a) Lack of variety
b) Double coincidence of wants
c) Low production
d) Lack of labor

Ans: (b)

Explanation: The main drawback of barter is the need for a double coincidence of wants: each trader must have what the other wants. This makes exchanges difficult and limits the scale of trade.

Q4. Define credit in simple terms. (1 Mark)
Ans: Credit is an agreement in which a lender gives money, goods or services to a borrower with the understanding that the borrower will repay the lender later. A simple way to view credit is:

A promise to pay back borrowed money or goods at an agreed time.

Examples: A shoe manufacturer borrows materials and cash to fulfil an order and repays the lender after completing the order and earning profit.

• Sources: Credit can come from formal sources, such as banks, or informal sources, such as moneylenders.
• Importance: Access to credit is important for production, trade and economic development.

Q5. Name any one modern form of money. (1 Mark)
Ans: Currency (paper notes and coins)

Modern forms of money also include digital money, such as bank deposits and electronic transfers. Modern currency is not made from precious metals and has value because the government declares it acceptable for payments. In India, the Rupee is the official currency and must be accepted for transactions.

Q6. How does a cheque function as a medium of exchange? (2 Marks)
Ans: A cheque allows payment without handing over cash. It works as follows:

• The payer writes a cheque for a specified amount, instructing their bank to pay that amount.
• The cheque is given or sent to the payee.
• The payee deposits the cheque into their bank account.
• The bank processes the cheque and transfers funds from the payer's account to the payee's account, completing the payment.

Q7. Give any two features of demand deposits. (2 Marks)
Ans: Demand deposits have the following features:

• Instant access: Money can be withdrawn at any time without prior notice.
• Cheque facility: Account holders can make payments using cheques, which simplifies transactions.

Q8. Mention any one positive and one negative effect of credit, using examples. (2 Marks)
Ans: Positive effect:

• Credit can increase economic activity. For example, a shoe manufacturer like Salim can borrow funds to buy materials and hire workers, enabling him to take larger orders and earn higher profits.

Negative effect:

• Credit can create debt problems when incomes fail. For instance, if a farmer like Swapna suffers crop failure, she may be unable to repay a loan and could fall into financial distress or lose assets.

Q9. Explain any three terms that make up the Terms of Credit. (3 Marks)
Ans: Terms of credit are the conditions under which credit is given. Three important terms are:

• Interest rate: The cost of borrowing, shown as a percentage of the loan. A lower rate makes borrowing cheaper.
• Collateral: An asset pledged by the borrower to secure the loan; the lender may sell it if the borrower defaults.
• Documentation requirements: Papers and information the borrower must provide, such as identity proof and income statements, so the lender can assess repayment capacity.

These terms vary with the lender and the borrower's situation.

Q10. What is the difference between formal and informal sources of credit? Give any three points. (3 Marks)
Ans: Formal and informal sources of credit differ in these ways:

• Interest rates: Formal institutions like banks generally charge lower and regulated interest rates; informal lenders often charge much higher rates.
• Regulation: Formal credit is regulated by authorities such as the Reserve Bank of India, which enforces rules and consumer protection; informal lenders operate without formal oversight.
• Accessibility: Formal loans usually require documentation and sometimes collateral, making them harder to obtain for the poorest; informal lenders are more flexible but costly.

Q11. Describe the role of the Reserve Bank of India in supervising banks. (3 Marks)
Ans: The Reserve Bank of India (RBI) supervises banks to ensure a stable and trustworthy banking system. Its roles include:

• Monitoring cash reserves: Ensuring banks maintain the minimum required cash balances so they can meet depositors' needs.
• Regulating lending: Guiding banks to lend responsibly, including to small borrowers, farmers and small industries.
• Collecting data: Requiring banks to report details of lending, deposits and interest rates so the RBI can monitor the banking sector.
• Ensuring fair practices: Protecting customers from unfair terms and reducing the influence of exploitative informal lenders.

This supervision promotes public confidence and overall financial stability.

Q12. What are Self Help Groups (SHGs)? Explain any four ways in which they benefit the rural poor. (5 Marks)
Ans: Self Help Groups (SHGs) are small voluntary groups, usually of 15-20 members, often women from rural areas, who save regularly and lend to each other. Four benefits for the rural poor are:

• Access to credit: Members obtain small loans from the group at lower and more flexible rates than from informal moneylenders.
• Financial independence: Participation helps members, especially women, manage their own money and make economic decisions.
• Social empowerment: Regular meetings create a forum to discuss health, education and nutrition, strengthening community support and awareness.
• Eligibility for bank loans: Consistent group savings and records make SHGs eligible for larger loans from banks, allowing members to invest in livelihoods and small businesses.

Q13. Explain the need for increasing formal sector credit in India. How can this help in reducing dependence on informal loans? (5 Marks)
Ans: Increasing formal sector credit is important for several reasons and helps reduce reliance on informal loans:

• High interest rates in the informal sector: Informal loans often carry very high interest, which keeps borrowers poor. Expanding formal credit provides cheaper borrowing alternatives.
• Improved rural lending: If banks and cooperatives increase lending in rural areas, farmers and small producers can access reasonable loans instead of depending on moneylenders.
• Fair access: Making formal loans more accessible to poorer households reduces inequality in credit access and enables productive investment.
• Boost to incomes and growth: Cheaper and organised credit helps people invest in agriculture, small firms and skills, raising income levels and promoting economic growth.
• Preventing debt traps: Availability of affordable formal loans reduces the risk of borrowers falling into debt traps caused by exploitative informal lenders.