Q.1 What are the modern forms of money? Why is the ‘rupee’ widely accepted as a medium of exchange? Explain two reasons. (2013 D)
Or
Why is modern currency accepted as a medium of exchange without any use of its own? Give reasons?
Answer:
Modem forms of money currency in India include paper notes and coins which are known as Rupees and Paise.

1. It is accepted as a medium of exchange because the currency is authorized by the Government of India.
2. In India, the Reserve bank of India issues currency notes on behalf of the Central Government of India.
3. The law legalizes the use of rupee as a medium of payment that cannot be refused in settling transaction in India.
4. No Individual in India can legally refuse a payment made in rupees.
   Therefore, the rupee is widely accepted as a medium of exchange.

Q 2
What is collateral? Why do lenders ask for collateral while lending? Explain. (2012)
Answer:
Collateral is an asset that the borrower owns (land, building, vehicle, livestock, land documents, deposits with banks etc.) which stands as a security against the money borrowed. In case the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to recover the loan money. Most lenders ask for collateral while lending as a security against their own funds.

Q 3
“Cheap and affordable credit is essential for poor households both in rural and urban areas.” In the light of the above statement explain the social and economic values attached to it. (2013 OD)
Or
“Cheap and affordable credit is crucial for the country’s development.” Assess the statement. (2016 D)
Or
‘Credit has its own unique role for development’. Justify the statement with arguments. (2016 OD)
Answer:
Credit means: It refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future repayment.

1. Cheap and affordable credit is crucial for the country’s growth and economic development. Credit is in great demand for various kinds of economic activities—big or small investments, to set up business, buying cars, houses, etc.
2. In rural areas credit helps in the development of agriculture by providing funds to farmers to buy seeds, fertilizers, expensive pesticides.
3. Manufacturers need credit for buying raw material or to meet ongoing expenditure of production. Credit helps in the purchase of plant, machinery, equipment, etc.
4. Some people may need to borrow for illness, marriages etc.
   Thus, cheap and affordable credit is crucial for the country’s growth and economic development.

Q.4
How does money solve the problem of double coincidence of wants? Explain with an example. (2014 D)
Answer:
Money acts as a medium of exchange. Money can be exchanged for any kind of commodity or service of one’s choice or need. Before money was introduced, people practised barter system. They exchanged goods with each other.
Example, A farmer could buy a dhoti from a weaver or a pair of shoes from a cobbler in exchange of grains he produced.

The problem with the barter system was that both the parties had to agree to sell and buy each other’s product. This is known as double coincidence of wants.

In barter system, where goods are directly exchanged without the use of money, it is essential that there is a double coincidence. Double coincidence is a situation where two persons need or desire to have each other’s product.

Money solves this problem as with money we can buy whatever we want and whenever we want, without having to exchange something in return.

Q.5
How is money used in everyday life? Explain with examples. (2014 D)
Answer:

1. Money plays a central role in our daily life. It is used as a medium of exchange to carry out transactions.
2. Money buys us food, clothing, shelter and other basic necessities of life.
3. Money provides us social security. It is needed to procure services like transport, education, healthcare, entertainment, recreation, and so on. Money facilitates business and trade and is the basis of the working of an economy.

Q.6
Explain with examples, how people are involved with the banks. (2014 D)
Answer:

1. Banks help people to save their money and keep their money in safe custody of the bank. Banks accept deposits from the public and also help people to earn interest on their deposits.
2. People can withdraw the money deposited with the bank at the time of their need. As the money can be withdrawn on demand, these are called demand deposits.
3. Banks also grant loans to people for a variety of purposes. In times of need individuals, business houses and industries can borrow money from the banks.

Q.7
Why is it necessary for the banks and cooperative societies to increase their lending facilities in rural areas? Explain. (2015 D)
Answer:
Banks and Cooperatives can help people in obtaining cheap and affordable loans. This will help people to grow crops, do business, set up small-scale industries or trade in goods and also help indirectly in the country’s development. They should do so, so that relatively poor people do not have to depend on informal sources of credit (money-lenders).

Q 8
How can money be easily exchanged for goods or services? Give an example to explain. (2016 D)
Answer:
Money as a medium of exchange for goods and services:
A person holding money can easily exchange it for any commodity or service that he or she might want. Everyone prefers to receive payments in money and exchange the money for things they want.

For example: A shoemaker wants to sell shoes in the market and buy wheat. The shoe maker will first exchange shoes for money and then exchange the money for wheat. If the shoemaker had to directly exchange shoes for wheat without the use of money, he would have to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy the shoes in exchange. Both the parties have to agree to sell and buy each other’s commodities. This process is very difficult, time consuming and unhealthy.

Q.9
“The credit activities of the informal sector should be discouraged.” Support the statement with arguments. (2016 D)
Answer:
The credit activities of the informal sector should be discouraged because:

1. 85% of loans taken by the poor households in the urban areas are from informal sources. There is no organisation that supervises the credit activities of lenders in the informal sector.
2. Informal lenders charge very high interest on their loAnswer: They try to charge more and more interest on their loans as there are no boundaries and restrictions.
3. Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
4. In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of borrower. This could lead to increasing debt and debt trap, therefore the credit activities of the informal sector should be discouraged.

Q.10
Why do we need to expand formal sources of credit in India? (NCERT Question)
Answer:

1. There is no organisation that supervises the credit activities of lenders in the informal sector. They lend at whatever interest rate they choose.
2. No one can stop rural money-lenders from using unfair means to get their money back.
3. Informal lenders charge a very high rate of interest on loans and as a result a larger part of the earnings of the borrowers and farmers are used to pay the loans.
4. The amount to be repaid is often greater than income, and farmers and other borrowers in villages fall in a debt trap.
   Thus, it is necessary that banks and co-operatives increase their lending, particularly in rural areas, so that dependence on informal sources of credit ends.

Important Link

Quick Revision Notes : Money and Credit

NCERT Solution : Money and Credit

MCQs: Money and Credit

Click here for Free Video Lectures