X_Economics_Chapter-3_Money & Credit_Practice Set_Part 2.

Class X           Chapter – 3

Money and Credit  -  Practice Questions (2)

Ques. What are the functions of Money?

Ans. The major functions of Money are as follows:

1.            Money as the Medium of Exchange:

This is the primary function of money. People exchange different goods and services through the medium of Money. By serving this way, money has solved the problems faced in barter system.

2.            Money as a Unit of Account:

Money serves as a unit of account or measure of value. Different commodities are measured in different units e.g. milk in liters, cloth in meters, potatoes in kg. Therefore, the exchange of goods for each other had been difficult. But money has given them a single measuring rod i.e. now, the value of these goods can be expressed in common unit of money.

3.            Standard of Deferred Payments:

Deferred payments are payments which are made some time in future. Debts are now expressed in terms of money. Money has made it easier to borrow and repay the loans because the value of money generally maintains a constant value through time.

4.            Money as a Store of Value:

Wealth can be stored in terms of money for future. Thus, the value is stored in most liquid asset form i.e. money. By spending money, we can quickly get any commodity in future.

Ques. What is ‘Liquidity of Money’?

Ans. Liquidity of Money: Liquidity means convertibility into cash. The ability to convert an asset into money quickly without any loss in its value is called liquidity of the asset. Money is the most liquid asset of all. One can convert money into any commodity or any other asset easily, quickly and without any loss at any point of time.

Ques. Define Bank.

Ans. Bank: Any institution which accepts deposits from the public and advances loans is called a bank. Thus, a bank acts as a financial intermediary.

Ques. What is banking?

Ans. Banking: Banking means the accepting deposits of money from the public (repayable on demand or otherwise, and withdrawable by cheques, draft etc.) for the purpose of lending.

Ques. What do you mean by Commercial Bank?

Ans. Commercial Bank: The financial institution which performs the function of accepting deposits from general public and giving loans for investment with the aim of earning profit.

Ques. What are the primary functions of a bank.

Ans. The primary functions of a bank are as follows:

1.            Bank accepts deposits: A commercial bank accepts deposits in the form of current, saving and fixed deposits. Bank collects savings of individuals and firms. Deposits are the lifeline of a bank.

2.            Bank gives loans and advances: Bank gives loans particularly to the businessmen and entrepreneurs and thereby earns interest. This is the main source of bank’s income. Bank keeps certain amount of deposits as reserves and gives the balance amount as loans and advances.

Ques. What is a Central Bank? Name the central bank of India.

Ans. Central Bank: The central bank is apex institution of monetary system of a country. It organizes, supervises, regulates and develops the monetary system of the country.

            In India, the name of central bank is Reserve Bank of India (RBI). At present, the governor of RBI is Urjit Patel (took the charge in Sep, 2016), preceded by Raghuram Rajan.

Ques. What are the functions of the central bank of a country?

Ans. The functions of central bank are as follow:

1.            Issue of Currency: The central bank is given the sole monopoly of issuing currency in order to secure the volume of currency and credit in the economy. In India, all currency notes except one rupee note and coins are issued by RBI. One rupee notes and coins are issued by government mints.

2.            Banker to the Government: Central bank functions as a banker to the government -  both central and state governments. It carries out all banking business of the govt. Government keep their money in the current account with central bank. Central bank accepts receipts and makes payments on behalf of the governments.

3.            Banker’s Bank and Supervisor: The central bank regulates and supervises the functioning of all banks of the country. Central bank acts as banker’s bank in three capacities:

(a)          Custodian of the cash reserves of banks.

(b)          Lender of last resort.

(c)          Acts as a bank of central clearance, settlements and transfers.

4.            Controller of Credit and Money Supply: Central bank controls the credit and money supply through its monetary policy which consists of two parts – currency and credit. It serves this purpose through different monetary policy instruments.

Ques. Differentiate between central bank and commercial banks.

 Ans.

Central Bank	Commercial Bank
·                     It is the apex bank in the money                    market of the country.	·                     It is merely a unit in the banking                    structure of the country.
·                     Its primary aim is public welfare.	·                     Its primary aim is to make profit.
·                     It has the sole monopoly to                    currency notes.	·                     Its not authorized to issue                    currency notes.
·                     It cannot deal with public.	·                     It directly deals with the public                    and business firms.
·                     It acts as a banker to the govt.	·                     It has no such responsibility to govt.
·                     It is a custodian of nation’s Gold                    and Foreign Exchange Reserves.	·                     It does not perform such function.
·                     It decides the monetary policy to                    stabilize the economy.	·                     It plays supplementary role in that                    & is regulated by the central bank.

X_Economics_Chapter-3_Money & Credit_Practice Questions_Part 3.

Class X           Chapter – 3

Money and Credit  -  Practice Questions (3)

Ques.1. In situations with high risks, credit might create further problems for the borrower. Explain.

Answer: In situations with high risks, credit might create further problems for the borrower. This is also known as a debt-trap. Taking credit involves an interest rate on the loan and if this is not paid back, then the borrower is forced to give up his collateral or asset used as the guarantee, to the lender. If a farmer takes a loan for crop production and the crop fails, loan payment becomes impossible. To repay the loan the farmer may sell a part of his land making the situation worse than before. Thus, in situations with high risks, if the risks affect a borrower badly, then he ends up losing more than he would have without the loan.

Ques.2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.

Answer: In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. By serving as a medium of exchanges, money removes the need for double coincidence of wants and the difficulties associated with the barter system. For example, it is no longer necessary for the farmer to look for a book publisher who will buy his cereals at the same time sell him books. All he has to do is find a buyer for his cereals. If he has exchanged his cereals for money, he can purchase any goods or service which he needs. This is because money acts as a medium of exchange.

Ques.3. How do banks mediate between those who have surplus money and those who need money?

Answer: Banks keep small portion deposits as cash (15%) for themselves (to pay the depositors on demand). They use the major portion of the deposits to extend loans to those who need money. In this way banks mediate between those who have surplus money and those who need money.

Ques.4. Look at a 10 rupee note. What is written on top? Can you explain this statement?

Answer: “Reserve Bank of India” and “Guaranteed by the Government” are written on top. In India, Reserve Bank of India issues currency notes on behalf of the central government. The statement means that the currency is authorized or guaranteed by the Central Government. That is, Indian law legalizes the use of rupee as a medium of payment that can not be refused in setting transaction in India.

Ques.5. Why do we need to expand formal sources of credit in India?

Answer: We need to expand formal sources of credit in India due to:→ To reduce dependence on informal sources of credit because the latter charge high interest rates and do not benefit the borrower much.
→ Cheap and affordable credit is essential for country’s development.
→ Banks and co-operatives should increase their lending particularly in rural areas.

Ques.6. What is the basic idea behind the SHGs for the poor? Explain in your own words.

Answer: The basic behind the SHGs is to provide a financial resource for the poor through organizing the rural poor especially women, into small Self Help Groups. They also provide timely loans at a responsible interest rate without collateral.
Thus, the main objectives of the SHGs are:
→ To organize rural poor especially women into small Self Help Groups.

→ To collect savings of their members.

→ To provide loans without collateral.

→ To provide timely loans for a variety of purposes.

→ To provide loans at responsible rate of interest and easy terms.

→ Provide platform to discuss and act on a variety of social issues such education, health, nutrition, domestic violence etc.

Ques.7. What are the reasons why the banks might not be willing to lend to certain borrowers?

Answer: The banks might not be willing to lend certain borrowers due to the following reasons:

→ Banks require proper documents and collateral as security against loans. Some persons fail to meet these requirements.

→ The borrowers who have not repaid previous loans, the banks might not be willing to lend them further.

→ The banks might not be willing to lend those entrepreneurs who are going to invest in the business with high risks.

→ One of the principle objectives of a bank is to earn more profits after meeting a number of expenses. For this purpose it has to adopt judicious loan and investment policies which ensure fair and stable return on the funds.

Ques.8. In what ways does the Reserve Bank of India supervise the functions of Banks? Why is this necessary?

Answer: The Reserve Bank of India supervises the functions of banks in a number of ways:
→ The commercial banks are required to hold part of their cash reserves with their RBI. RBI ensures that the banks maintain a minimum cash balance out of the deposits they receive.

→ RBI observes that the banks give loans not just to profit making businesses and traders but also to small cultivators, small scale industries, small borrowers etc.

→ The commercial banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate etc.
This is necessary to ensure equality in the economy of the country and protect especially small depositors, farmers, small scale industries, small borrowers etc. In this process RBI also acts as the lender of the last resort to the banks.

Ques.9. Analyse the role of credit for development.

Answer: Cheap and affordable credit plays a crucial role for the country’s development. There is a huge demand for loans for various economic activities. The credit helps people to meet the ongoing expenses of production and thereby develop their business. Many people could then borrow for a variety of different needs. They could grow crops, do business, set up industries etc. In this way credit plays a vital role in the development of a country.