Money and Credit NCERT Economics Lesson 3 Question & Answers

 

 Money and Credit

    i. In situations with high risks, credit might create further problems for the borrower.

    Answer:

        In situations with high risks, credit might create further problems for the borrower because:

• The borrower has to pay fixed interest on the money borrowed. The return on investment may or may not come due to uncertainty in business or farming.
• If the borrower fails to pay to borrowed money to the lender, then he might face a legal case in the court of law which will create additional problem for him.
• High risk is associated with high rate of interest.  Payment of high rate of interest will create problem for borrower if returns from his or business are not adequate.

 ii. How does money solve the problem of double coincidence of wants? Explain with and example of your own.

    Answer:

        A person holding money can easily exchange it for any commodity or service that he or she might want. Thus everyone prefers to receive payments in money and then exchange the money for things that they want. 
        Take the case of a shoe manufacturer. He wants to sell shoes in the market and buy wheat. The soe manufacturer will first exchange shoes that  he has produced for money, and then exchange the money for wheat. He would have to look for a wheat growing farmer who not only wants to sell wheat but also want to buy the shoes in exchange.
        That is both parties have to agree to sell and buy each others commodities. This is known as double coincidence of wants. In a economy where money is in use. money by providing the crucial intermediate step eliminates the need for double coincidence of wants. It is not longer necessary for the shoe manufacturer to look for a farmer how will buy his shoes and at the same time sell wheat.
        All he has to do is find a buyer for his shoes. Once he has exchanged his shoes for money , he can purchase wheat or any other commodity in the market. Since money acts as an intermediate in the exchange process, it is called a medium of exchange.

    iii. How do banks mediate between those who have surplus money and those who need money?

    Answer:

• There is an interesting mechanism at work here. Banks keep only a small proportion of their deposits as cash with themselves.
• This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day. Since,  on any particular day, only some of its many depositors com to withdraw cash, the bank is able to manage with this cash.
• Banks use the major portion of the deposits to extend loans. There is huge demand for loans for various economic activities.
• Banks make use of the deposits to meet the loan requirements of the people. In this way, banks mediate between those who have surplus funds ( the depositors) and those are in need of these funds( the borrowers).

    iv. Look at a 10 rupee note. What is written on top? Can you explain this statements?

    Answer:

        On top of 10 rupee note "Reserve Bank of India, Guaranteed by Central Government" is written. This means that the central government guarantees the undertaking of the RBI  which is obligated to exchange a bank note of a higher denomination with that of bank notes of lower value or with coins. A currency note cannot be rejected by anybody in India for exchange of goods and services.

    v. Why do we need to expand formal sources of credit in India?

    Answer:

        We need to expand formal sources of credit in India to endure that loans are available at reasonable terms and conditions and lowe rate of interest. Formal sources of credit also help in expansion of banking and financial business which reaches to the remote area of the country.

    Bank loan on lower interest rate increase the earnings of borrower and they can easily repay their loan and can also take further loan. Formal sources of credit save people from the hands of moneylender, trader who indulge in malpractices.

    vi. What is the basic idea behind the SHGs for the poor? Explain in your own  words?

    Answer:

        The idea is to organise rural poor, in particular women, into small Self Help Group (SHGs) and pool(Collect) their savings. 

        A typical SHG has 15-20  members, usually belonging to one neighbourhood, who meet and save regularly. Saving per member varies from Rs 25 to Rs 100 or more.

      

    vii. What are the reasons why the bans might not be willing to lend to certain borrowers?

    Answer:

        The bank might not be willing to lend  to certain borrowers because they do not have regular income or they are unemployed.

    - Also, some borrowers might have bad credit repaying due which  certain banks do not give loans to these borrowers.

    - Bad credit rating arises out of default in repaying loan taken in the past.

    Certain borrowers do not have assets or collateral deposit in the bank as security.

    viii. In what ways does the Reserve Bank of India supervise the functioning of banks?

    Answer:

• RBI decides the cash reserve ratio for the commercial banks.
• It also monitors on regular basis that cash reserve ratio (CRR) on total bank deposits should be maintained.
• Guidelines are also issued to the banks to give loans to all sections of the society.
• Charging excessive interest rate should be avoided.
• Commercial banks are also required to submit the details of loans they have given with rate of interest of each loan.
• Public deposit money should be not  misused by giving loan to those people where money cannot be recovered.        

 Fill in the blanks.

1. Majority of the credit needs of the _______ household are met from informal sources.

answer:  poor

2. ________ costs of borrowing increase the debt-burden.

answer:  Higher

3. _______ issues currency notes on behalf of the Central Government.

answer:  RBI

4. Banks charge a higher interest rate on loans than what they offer on _______.

answer:  deposits

5. _______ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.

answer:  Collateral.

 Choose the most appropriate answer.

i) In SHG most of the decisions regarding saving and loan activities are taken by 

1. Bank
2. Members
3. Non-government organisations

    Answer :  B. Members

    

ii) Formal sources of credit does not include

1. Banks
2. Cooperatives
3. Employers 

    Answer :  C. Employers