MONEY AND CREDIT

SECTION A
VERY SHORT ANSWER TYPE QUESTION

1) What is the main source of income of a bank?

(a) Bank charges that the depositors pay for; keeping their money safe is the main; source of the bank’s
income.
(b) The difference between what is charged from the borrowers and paid to the depositors is the main
source of bank’s income.
(c) Banks earn huge amounts of money by investing the money of the depositors in various company
shares.
(d) The Government of India gives huge amounts of money to the banks to help their smooth functioning.

2) What portion of deposits are kept by the banks for their day to day transaction?
(a) 10%
(b) 15%
(c) 20%
(d) 25%

3) Who helps the borrowers to overcome the problem of lack of collateral?

(a) Self-help group (SHG)
(b) State government
(c) Employers
(d) Moneylenders

4) Rate of interest charged by moneylenders as compared to that charged by banks is:

(a) Lower
(b) Same
(c) Slightly higher
(d) Much higher

5) Money
(a) Eliminates double coincidence of wants
(b) Acts as a common measure of value
(c) Acts as a standard of deferred payments
(d) All the above

6) What is Barter System?

7) What is meant by double coincidence of wants?

8) Why one cannot refuse a payment made in rupees in India?

9) How does money act as medium of exchange?

10) Why is the supervision of the functioning of formal sources of loans necessary?

SECTION B
SHORT ANSWER TYPE QUESTION

11) “The credit activities of the informal sector should be discouraged.” Support the statement with
arguments.

12) Seema wants to open a small flower shop near the village Temple for which she needs Rs. 35,000.
Briefly explain which is the best Credit source for her and why?

13) “The banks and cooperative societies should increase their lending facilities in rural areas”. Do you
agree with this? Give reasons in support of your answer.

14) Which government body supervises the functioning of formal sources of loans in India? Explain its
functioning.

(15) Which type of deposits with the banks are called Demand Deposits? State some important features
of Demand Deposits.

SECTION C
LONG ANSWER TYPE QUESTION
16) Read the source given below and answer the questions that follows:

Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the
repayment of the principal. In addition, lenders may demand collateral (security) against loans. If the
borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment.
Property such as land titles, deposits with banks, livestock are some common examples of collateral used
for borrowing. Interest rate, collateral and documentation requirement, and the mode of repayment
together comprise what is called the terms of credit. The terms of credit vary substantially from one
credit arrangement to another. They may vary depending on the nature of the lender and the borrower.

(i)Which one of the following is the appropriate meaning of collateral?

(a) It is the sum total of money borrowed from banks.
(b) The amount borrowed from friends.
(c) It is an asset of the borrower used as guarantee to a lender.
(d) The amount invested in a business.

(ii) What is the ‘collateral’ demand that lenders make against loans?
(a) Vehicle of the borrower
(b) Building of the borrower
(c) Both (a) and (b)
(d) None of these

(iii)Which of the following is a major reason which prevents the poor from getting bank loans?

(a) Absence of collateral (security)

(b) Non-repayment of loans
(c) Higher Interest rates
(d) Documentation

(iv)Terms of credit do not include:

(a) interest rate
(b) collateral
(c) documentation
(d) lender’s land

17) Read the source given below and answer the questions that follows:

The other form in which people hold money is as deposits with banks. At a point of time, people need
only some currency for their day-to-day needs. For instance, workers who receive their salaries at the end
of each month have extra cash at the beginning of the month. They deposit it with the banks by opening
a bank account in their name. Banks accept the deposits and also pay an amount as interest on the
deposits. In this way people’s money is safe with the banks and it earns an amount as interest. People
also have the provision to withdraw the money as and when they require. Since the deposits in the bank
accounts can be withdrawn on demand, these deposits are called demand deposits.Demand deposits
offer another interesting facility. It is this facility which lends it the essential characteristics of money (that
of a medium of exchange). You would have heard of payments being made by cheques instead of cash.
For payment through cheque, the payer who has an account with the bank, makes out a cheque for a
specific amount. 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 issued.

i) The facility of cheques against demand deposits makes it possible to directly settle payments
without the use of………
a) Deposit slip
b) Cash
c) Moneylender
d) Other funds

ii) How do banks mediate between those who have surplus funds (the depositors) and those who are
in need of these funds (the borrowers)?
a) Mutual funds
b) Share dividend
c) Loans
d) Deposits

iii) Banks accept the deposits of the customer and also:

a) Give a gold coin in return
b) Give a silver coin in return
c) Give a cheque book
d) Pay an interest rate on deposits

iv) Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called:
a) Smart deposit
b) Quick deposits
c) Demand deposits
d) All the above.
18) What are the differences between formal and informal sources of Credit?

19) “Deposits with the Banks are beneficial to the depositors as well as to the Nation”. Examine the
statement.
20) What is the basic objective of ‘Self Help Groups’? How do they work? Describe any four
advantages of ‘Self Help Groups’ for the poor.
21) “Credit is useful as well as harmful, it depends on the risk involved”. Support the statement with
example.
22) How does money solve the problem of double coincidence of wants? Explain with an example.

ANSWER KEY
1.(b) The difference between what is charged from the borrowers and paid to the depositors is the main
source of bank’s income.
2. (b) 15%
3. (a) Self-help group (SHG)
4. (d) much higher
5. (d) All the above
6. Answer: Barter is a system of exchange in which goods are directly exchanged without the use of
money.

7. Answer: Both parties, the seller and they buyers have to agree to sell and buy each other commodities.
Goods are directly exchanged without the use of money.

8. Answer: One cannot refuse a payment made in rupees because it is accepted as a medium of exchange.
The currency is authorized by the government of India.

9. Answer: It acts as an intermediate in the exchange process and transactions. We can buy things if we
have money in our pockets.

10. Answer: It is necessary because banks have to submit information to the RBI on how much they are
lending, to whom they are lending and what interest rate, etc.

11. Hint: Disadvantages of Credit Activities of the Informal Sector.

12. Hint: The best credit source for Seema is to go to Self-Help Groups.
13. Hint: Role of Banks and Cooperatives in improving financial condition of rural arears.
14. Hint: RBI and its functions
15. Hint: Definition of Demand Deposits and two important features.
16. (i) Answer: (c) It is an asset of the borrower used as guarantee to a lender.
(ii) Answer: (c) Both (a) and (b)
(iii) Answer: (a) Absence of collateral (security)
(iv) Answer: (d) lender’s land
17. (i) b) Cash
(ii) c) Loans
(iii)
(iv)
18. Hint: Areas of differences – Borrower’s capacity of lending, Rate of Interest, Sources of Credit, Action
on default of repayment and Supervision and periodic checking
19. Hint: Benefits for Depositors and Benefits for Nation
20. Hint: Aims and functioning of Self-Help groups and its four advantages.
21. Hint: Useful → Help to fulfil the needs of working capital
 Harmful → Debt-trap
22. Hint: Money solves the problem of double coincidence of wants by acting as a medium of exchange