Important Questions (1 Mark): Money & Credit - Free MCQ Test with solutions

The correct answer is C as System of exchanging goods for goods is called barter system. Moreover this system prevailed in old times

The primary business model of banks involves accepting deposits from the public and then using a major portion of these deposits to extend loans to individuals, businesses, and other entities. This is how banks earn interest income. Options (b) and (c) may be part of a bank's activities but do not represent the major use of deposits. Therefore, option (a) is correct.

The mode through which the borrower will repay the loan must be clearly mentioned. Interest rate, collateral and documentation requirement and the mode of repayment together comprise what is called the terms of credit.

Credit or Loan Agreement

• Lender and Borrower: Credit or loan refers to an agreement between a lender, who provides funds, and a borrower, who receives the funds with the promise to repay them at a later date.
• Consumer and Producer: While consumers may borrow money to purchase goods or services, the agreement is still primarily between the lender and borrower.
• Government and Tax Payer: In some cases, governments may provide loans to taxpayers, but this is not the primary definition of credit or loan agreements.

Therefore, the correct answer is Option A: lender and borrower. This relationship is at the core of credit and loan agreements, where one party provides funds while the other party agrees to repay them with interest.

In rural areas, agriculture is often the main occupation. Credit is predominantly required for inputs into crop production, such as seeds, fertilizers, and irrigation facilities. While options (a), (b), and (c) are valid reasons for seeking credit, they do not represent the main demand in rural contexts, where agricultural needs predominate. Thus, option (d) is correct.

Collateral as a Repayment Guarantee:

• Definition: Collateral is an asset that a borrower offers to a lender as a guarantee for repayment of a loan. It serves as a form of security for the lender in case the borrower defaults on the loan.
• Types of Collateral: Collateral can come in various forms such as real estate, vehicles, equipment, inventory, or even cash savings.

Overall, collateral plays a crucial role in the lending process by providing security for lenders and increasing the likelihood of loan approval for borrowers.

Issuance of Currency in India

• Reserve Bank of India: The Reserve Bank of India is the sole authority responsible for issuing currency in India. It is the central banking institution that controls the monetary policy of the country.
• Commercial Banks: While commercial banks play a significant role in the distribution and circulation of currency, they do not have the authority to issue currency. They obtain currency from the Reserve Bank of India for their banking operations.
• Regional Rural Banks: Regional Rural Banks also do not have the authority to issue currency. They operate under the supervision of the Reserve Bank of India and other regulatory bodies.
• Nationalised Banks: Nationalised banks, like commercial banks, do not have the authority to issue currency. They rely on the Reserve Bank of India for the supply of currency notes and coins.

Therefore, the correct answer is that currency in India is issued by the Reserve Bank of India.

Collateral is an asset that a borrower offers to a lender as security for a loan. If the borrower fails to repay the loan, the lender has the right to seize the collateral. Livestock, land, and deposits with banks are all common forms of collateral, as they can be easily valued and sold by the lender if necessary. Therefore, option (d) "All of the above" is the correct answer.

The informal sector includes those sources of credit that are not regulated by formal financial institutions and government policies. Moneylenders and traders often provide loans without formal procedures and documentation, thus falling into the category of informal sector loans. Cooperatives, however, are considered part of the formal sector because they are organized groups that operate under specific regulations. Therefore, option (d) "Only (a) and (b)" is correct.

D is the correct option.A moneylender's loan will generally have a higher APR (Annual Percentage Rate) than a loan from a credit union or a bank. The APR will be at least 23% and may be much more in some cases.

Cooperative societies are formal sources of credit because they are regulated entities that pool resources from their members to provide loans and other financial services. Unlike traders, moneylenders, and borrowing from friends and relatives, cooperatives operate under specific legal frameworks and guidelines, making them part of the formal financial system. Thus, option (b) is correct.

Modern currency primarily serves the function of facilitating exchange by acting as a widely accepted medium of payment, eliminating the need for the double coincidence of wants, and enabling smoother economic transactions.

Collateral in a loan agreement serves as a guarantee for the lender, ensuring that if the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to recover the outstanding amount. This reduces the lender's risk and provides security for the loan.

Collateral is an asset that the borrower owns and uses as a guarantee to a lender until the loan is repaid. Common examples of collateral used for borrowing include land, building, vehicle, livestock, and deposits with banks.

The Assertion that money serves as a medium of exchange, unit of account, and store of value is true. Money indeed plays these crucial roles in an economy.

The Reason that credit facilitates borrowing and lending, contributing to economic activities is also true. Credit enables individuals and businesses to access funds for various purposes.

However, the Reason is not the correct explanation of the Assertion. The Assertion states that money serves as a medium of exchange, unit of account, and store of value, which are intrinsic functions of money itself. The Reason, on the other hand, discusses credit facilitating borrowing and lending, which, although related to economic activities, does not directly explain why money serves those particular roles.