Question.1: What is money?
Answer: Money is a medium of exchange and measure of value.
Question.2: What are the different kinds/types/forms of money?
Answer: Money can be classified into the following types or forms:
Coins such as gold, silver, copper coins.
Paper notes,
Fiat money,
Credit money or deposits with Banks, and
Commodity money in the form of grains, cattle etc.
Question.3: What is the meaning of “double coincidence of wants”?
Answer: Double coincidence of wants means: Both parties, the seller and buyers have to agree to sell and buy each others commodities. Goods are directly exchanged without the use of money.
Question.4: What is “Barter System”?
Answer: Barter system is a type of system in which exchange of goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money.
Question.5: Why money is called a medium of exchange?
Answer: Money helps to facilitate trade because people in the economy generally recognize it as valuable. Money is called medium of exchange because money is a widely accepted token that can be used for exchange of any good or service. In old days, barter system was used as medium of exchange and later it was gold.
Question.6: Define - (a) Credit (b) Terms of Credit (c) Collateral (d) Fiat Money (e) Cheque (f) Demand DepositsAnswer: (a) Credit: Credit or Loan refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. Credit is a crucial element in economic life and plays an important role in the development of the country.(b) Terms of Credit: The interest rate, collateral, documentation requirement and the mode of payment are the various factors which together comprise the “Terms of Credit”.
(c) Collateral: Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid. Collaterals can be land, building, vehicle, stocks, cattle, bank deposits etc.
(d) Fiat Money: The ‘Fiat Money’ is meant for that money which serves as money on the basis of fiat or order of government.
(e) Cheque: A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been made.
(f) Demand Deposits: The deposits in the bank account which can be withdrawn on demand are known as ‘Demand Deposits’.
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Question.7: How does the use of money make it easier to exchange things?
Answer: Money overcomes the inefficiencies of the Barter system. Suppose a farmer who grows wheat wanted potatoes from another farmer who grows potatoes. There won't be any issue as long as the wheat growing farmer wants potatoes and the potato growing farmer wants wheat. Both items can be exchanged by the barter system. The problem would arise if the wheat growing farmer needs potatoes but the potato growing farmer needs tomatoes from a different farmer. The Barter system would not be useful in this case. To overcome this difficulty, money is used where money can be paid directly to buy what is needed without waiting for 'double coincidence of wants' to arise.
Question.8: Can you think of some examples of good services being exchanged or wages being paid through barter?
Answer: Barter exchange is refered to as the situation when goods are exchanged for goods.
Some of the examples of barter exchange are as follows:
- The worker working in the field of farmers gets wheat in return.
- In villages generally grains are exchanged with pulses.
- Shoes are exchanges for cloth.
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Question.9: Mr. Salim wants to withdraw Rs 20,000 in cash for making payments. How would he write a cheque to withdraw money?
Answer: Fill in the date of withdrawal on the top right corner
Fill in the amount in number and in words.
Write the name of the person, on whose name your withdrawing. So write your full name, Salim....
Do the signature
Check account number, in some cheques its already written in some you have to fill it in.
Check all the details
In some banks you need to do two signatures at the back side of the cheque as well
Question.10: Why were demand deposits considered as money?
Answer: Demand deposits considered as money due to the following reasons:
These can be withdrawn from the bank whenever it is required.
They are widely accepted as a means of payment, along with the currency or a cheque instead of cash.
NCERT In-text Questions
Question.11: What would happen if all the depositors went to ask for their money at the same time?
Answer: If all the depositors went to ask for their money at the same time then the bank would simply run out of money. Usually, this does not happen. It happens only when there are rumors or news of banks becoming bankrupt.
Question.12: What were the reasons that make Swapna’s situations so risky? Discuss factors: pesticides, role of money lenders, climate.
Answer: The reasons for Swapna's situation being risky are:
Failure of crop due to either poor rainfall (climate problem) or attack on the crop by pests. Pesticides will reduce or eliminate the attack by pests and good rainfall will eliminate the risk due to climate.
Here the role of money lenders is important because they charge high interest rates and also will take away part of Swapna's land if she defaults on loan repayment when her crop fails. This will reduce her earning power even further in the future.
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Question.13: Why do lenders ask for collateral while lending?
Answer:
Lenders ask for collateral while lending, as a security for the loans they give to the borrower. They keep it as an asset until the loan is repaid.
Collateral is an asset or form of physical wealth that the borrower owns like house, livestock, vehicle etc. It is against these assets that the banks provide loans to the borrower. The collateral serves as a security measure for the lender.
Question.14: Given that a large number of people in our country are poor, does it in any way affect their capacity to borrow?
Answer: A large number of people in our country are poor and yes it affects the capacity to borrow in many ways. As we discussed in above question about collateral and we all know that only the person who has money will have assets or collateral to keep as mortgage. But if the whole residents are poor then no one will be able to borrow as they don’t have capacity to keep any mortgage or even borrow a penny from the bank. They mostly borrow from informal sectors like moneylenders, relatives and friends if the needed it.
Question.15: Fill in the blanks choosing correct option from the brackets:
While taking a loan, borrowers look for easy terms of credit. This means _________ (low/high) interest rate, ______ (easy/tough) conditions for repayment, ____________ (less/more) collateral and documentation requirements.
Answer: low, easy, less.
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Question.16: List the various sources of credit in Sonpur.
Answer: Various sources of credit in village Sonpur are
Question.17: Why will Arun have higher income from cultivation compared to Shyamal?
Answer: Arun will have higher income from cultivation compared to Shyamal. This has following reasons:
Arun has 7 acres of land compared to 1.5 acres land of Shyamal.
Arun received bank loans at an interest rate of only 8.5% per annum. On the other hand Shyamal has received loan at an interest rate of 36% per annum which is much higher than Arun’s.
Arun has to repay loan anytime in the next three years while Shyamal will have to repay within 3-4 months.
Shyamal received loan under the condition that he will sell the crop to the trader at a lower price than the market price while there no such condition with Arun.
Question.18: Can everyone in Sonepur get credit at a cheap rate ? Who are the people who can?
Answer: No, everyone cannot get credit at a cheap rate. Only the following people are able to get it
People having some collateral with them.
People who have organised themselves into a cooperative society.
The person who can fulfill the bank’s formalities at the time of loan borrowing.
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Question.19: What are the differences between formal and informal sources of credit?Answer: The various differences between formal and informal sources of credit are shown in the following table:
Question.20: Why should credit at reasonable rates be available for all?
Answer:
Credit should be available at reasonable rates for all as other wise it will not be useful for the borrower. Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loans. Credit given at high interest rate can sometimes result into the amount to be repaid is greater than the income of the borrower. This could lead to increasing debt and debt-trap as we saw for Rama in Sonpur.
Credit is a crucial element in economic activities. It has a major role in the development of the country as it helps people in setting up their business, in increasing their earnings and social status. Therefore, cheap and affordable credit is crucial for the country’s development.
Question.21: Why do you think that the share of formal sector credit is higher for the richer households as compared to the poorer households?
Answer: Formal source of credit includes all the sources for raising the credit from the institutions which are functioning under the guidelines of RBI or which work with specific rules and regulations. They are more reliable than informal sources. Banks and cooperatives are the main formal sources of credit.
The share of formal sector credit is higher for the richer households compared to the poorer households because:
Most of the formal sources of credit will be cheap compared to informal sources. Even though banks advance the loans with cheaper interest rate poor households are not able to avail that loan due to terms of credit and formalities.
The requirement of collateral for taking loans from institutional sources makes it impossible for the poor to take loans from banks and other institutions. Thus they have to rely on other informal sources.
Rural poor are not aware of the banking system because of the lack of education and awareness. Therefore they are forced to acquire a loan from the informal sources. Most of the people in rural areas don't have access to native bankers and other financial institution, this increases the share of informal sources of credit among the poor households.