Money and Credit Past Paper PDF

CHAPTER-3 MONEY AND CREDIT Q.1 Define money. Ans. Money is an instrument which act as a common medium of exchange, store of a value and common measure of value. Q.2 What is the main problem/feature experienced in Barter system of Exchange? Explain it. Ans. Double coi...

CHAPTER-3 MONEY AND CREDIT Q.1 Define money. Ans. Money is an instrument which act as a common medium of exchange, store of a value and common measure of value. Q.2 What is the main problem/feature experienced in Barter system of Exchange? Explain it. Ans. Double coincidence of Wants is an essential feature of Barter System of Exchange. It is a situation when both parties have to agree to sell and buy each other’s commodities. Q.3 How does the use of money make it easier to exchange the things? Ans. Since we can measure and express value of any product in terms of money, it acts as an intermediate in the exchange process and it can be used as a medium of exchange for any product. Q.4 What are the two modern forms of money? Ans. Currency and Bank money are nowadays used as modern forms of money. Q.5 What is demand deposits? Ans. Demand deposits are those deposits in the bank accounts that can be withdrawn on demand anytime. Q.6 Why the currency notes are accepted as money even when they do not have its own value as a commodity? Ans. Currency notes are accepted as a money because they are authorised by the government of India. They carry an assumed value with itself. Q.7 Define a cheque. Ans. 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. Q.8 Why do banks keep a small proportion of deposits as cash with themselves? Ans. Banks keep a small proportion of deposits as cash with themselves as a provisional money to pay the depositors who might come to withdraw money from the bank on any given day. Q.9 What is the main source of income for banks? Ans. The difference between the interest rate charged from the borrowers and the interest paid to the depositors is the main source of income for banks. Q.10 Define Credit. Ans. Credit (Loan) refers to an agreement in which the lender supplies the borrower with money, goods or services and the borrower promises for future payment. Q.11 Cheap and affordable credit is crucial for the development of a country. Explain. Ans. Cheap and affordable credit is crucial for the development of a country for the following reasons. i) Cheap credit helps in financial crisis and thereby provide source of investments at the time of crisis. ii) Cheap credit also helps in making good profit and fulfils the promises for future payments against his borrowing. iii) It also helps producers / traders in expanding their scale of production. They can take further risks to grab new opportunities. iv) It also encourages the start-ups by providing initial investment to them in the form of easy loans. v) Cheap credit also helps in asset building capacity of any firm/institution by providing them with the opportunity to expand their business. Q.12 Define Debt Trap. Ans. It refers to a situation when a person takes a fresh loan to repay his previous loan. He falls into a trap of never ending debt process. Q.13What are informal sources of credit? Mention any two features. Ans. Informal sources of credit include credit from traders, friends, relatives, moneylenders, employers etc. There is no such organisation to supervise the lending activities of such sources. The main features of the informal sources of credit are-  Rate of Interest is much higher compared to other sources of credit.  These sources often use unfair means to get their money back.  These sources are not supervised by anyone. Q.14 What do you mean by Cooperatives? Ans. Cooperatives refers to a group of persons who pool their resources for achieving a common goal. Here the common goal of cooperative is to provide cheap credit in rural areas, therefore it is also called credit cooperative society. Q.15 What is meant by terms of credit? What does it include? Ans. Terms of credit refers to general terms and conditions that needs to be satisfied for any kind of credit arrangement between borrower and creditor. It includes collateral, interest rate, mode of repayment and documents requirements. Q.16 Compare formal and Informal sources of credit in India? BASIS FORMAL SOURCES OF CREDIT INFORMAL SOURCES OF CREDIT Rate of Formal sources of credit charges genuine Informal sources of credit Interest and fixed rate of interest from all charges rate of interest as per borrowers. the choice and wish of moneylenders, traders or any other source.  Supervision Functioning of formal sources of credit is There is no organisation that governed by Reserve Bank of India. Their manages or checks the credit interest rate and lending details are activities performed by periodically checked by RBI. informal sources. Accessibility They provide cheap and affordable credit to Since, Informal sources of those only who can satisfy all the said terms credit provides loan without of credit. strict terms of credit but at higher rate of interest, so only poor section approaches to it. Formality/ Formal sources of credit need to satisfy all Informal sources of credit are Terms of the terms of credit. flexible in terms of credit. credit Q.17 ‘Higher cost of borrowing or expensive loans are a greater obstacle in growth and development of a country’. Explain. Ans. It is very true that expensive credit in our country is a major obstacle in growth and development of a country. It can be explained in following points- i) Loss of Collateral- Credit at higher rate of interest may pose problem for borrower in its repayment and then the borrower is forced to give up his collateral or asset to the lender. ii) Debt Trap- If the credit is available at high rate of interest, it would be difficult to repay this credit easily for poor investors and farmers. It may push them into a situation of debt trap where they are forced to take a fresh loan to repay it. iii) Less Profit- Higher cost of borrowing leaves less money as profit in the hands of borrower because they have to pay more. This will affect their investing activities in the long term. iv) Moral loss- Expensive loans leaves less profits for producers (especially start- ups) which demotivates them. Sometimes, they may also feel financial burden to repay the loan with very little income and unable to cope with the situation, they may commit suicide. v) Encouragement to Immoral activities- Expensive loans in a country are not affordable by everyone especially for very poor one. This forces them to indulge in immoral and criminal activities for meeting their basic requirements. Q.18 Why do we need to expand formal sources of credit in India? Ans. There is an urgent need to expand rural credit from the side of formal sector because- i) Protection from exploitation- Informal sectors exploit the rural poor by charging excessive high rate of interest. It pushes them into debt trap and hinders their growth. ii) Overall development- Cheap and affordable credit for the rural poor is important for overall development of the country. iii) Elimination of Regional Disparity- Expansion of credit through formal sources is crucially important in rural and backward areas to cure regional disparity. This will allow every state and region to develop in its own way. Q.19. What are self-help groups? State any four functions. Ans. A Self-Help-Group is a group formed by the community women, which has specific members between 15 and 20, who meet and save regularly. Saving may vary from Rs.25 To Rs.100 or more, depending upon the ability of the people to save. Functions of Self- Help- Groups are-  It also helps women in encouraging their habit of savings and then invest it in productive work.  It enhances confidence and productive capabilities of women.  It helps in developing collective decision-making ability among the women.  It also provides platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence etc.  The group also satisfy credit needs of poor people in rural areas and enable them to create self-employment opportunities.