CBSE Class 10 Economics Important Questions - Chapter 3 Money and Credit

1. Which of the following best describes why money is the most liquid type of asset?

a) It is not widely used by everyone

b) It includes shares and equities

c) It has certain functions

d) It acts as a medium of exchange

Ans: d) It acts as a medium of exchange

2. How does the exchange of goods become simpler when money is involved?

Ans: The use of money makes it easier to exchange things by acting as a common medium of exchange. Unlike the barter system, where a direct exchange of goods and services requires a double coincidence of wants, money allows people to sell their goods or services for a universally accepted currency. This currency can then be used to purchase any goods or services from others, simplifying transactions and eliminating the need for a direct exchange. This facilitates trade, makes transactions more efficient, and helps in setting standard prices for goods and services.

3. Give some instances of how products and services are traded or how wages are settled via barter.

Ans:

• Goods for Goods: A farmer exchanges a sack of rice with a weaver for a piece of cloth.

• Services for Goods: A carpenter builds furniture for a baker in exchange for a certain quantity of bread.

• Goods for Services: A mechanic repairs a farmer's tractor in exchange for fresh produce.

• Services for Services: A doctor provides medical treatment to a teacher in exchange for tutoring services for their children.

• Goods for Labour: A farmer provides food and accommodation to a labourer in exchange for working in the fields during harvest season.

• Services for Labour: A house painter offers painting services to a plumber in return for plumbing repairs in their home.

4. For what reason is contemporary money a means of exchange?

Ans:

• Modern currency is widely accepted by everyone within an economy, allowing people to buy and sell goods and services easily.

• Currency provides a standardised value for goods and services, making it easier to compare prices and conduct transactions.

• Modern currency can be divided into smaller units, facilitating transactions of varying sizes and enabling precise payments.

• Currency is easy to carry and transport, which makes it convenient for everyday transactions.

• Modern currency is designed to be durable and long-lasting, ensuring it can be used repeatedly over time without significant wear and tear.

• Currency is backed by the government and recognized as legal tender, meaning it must be accepted as a form of payment within the country.

5. Salim requests a cash withdrawal of Rs 20,000 to make payments. Describe the procedure for paying with a cheque.

Ans:

• Salim writes a cheque to "Self" or "Bearer" for Rs 20,000. He fills in the date, and the amount in words and figures, and signs the cheque.

• Salim takes the cheque to his bank branch where he holds his account.

• Salim presents the filled-out cheque at the bank's cash counter.

• The bank teller verifies the cheque details, including Salim's signature, account balance, and the validity of the cheque.

• Salim may need to provide identification, such as a bank passbook or an ID card, to confirm that he is the account holder.

• Once the cheque and identity are verified, the bank teller will process the cheque and hand over Rs 20,000 in cash to Salim.

6. Identify the four benefits of "Self Help Groups" for the underprivileged. Describe.

Ans:

• SHGs provide poor individuals, especially women, with access to credit without the need for collateral. By pooling savings and creating a common fund, SHG members can take small loans at low interest rates to meet their financial needs, start small businesses, or cover emergencies.

• SHGs empower their members by promoting self-reliance and decision-making skills. Through regular meetings and collective decision-making, members gain confidence, improve their financial literacy, and develop leadership abilities. This empowerment extends beyond economic benefits, enhancing their social status and participation in community activities.

• SHGs foster a sense of community and solidarity among members. They provide a platform for mutual support, where members can share their experiences, offer emotional support, and work together to solve common problems. This social cohesion helps build stronger, more resilient communities.

• By enabling members to save regularly and access affordable credit, SHGs contribute to economic stability and growth. Members can invest in income-generating activities, improve their livelihoods, and enhance their overall economic security. This, in turn, reduces poverty and improves the standard of living for SHG members and their families.

7. What makes demand deposits a form of currency?

Ans:

• Demand deposits are considered money because they serve the essential functions of money in an economy. They act as a medium of exchange, allowing individuals to make payments and conduct transactions through cheques or electronic transfers. 

• They also function as a store of value, enabling people to save their wealth securely in bank accounts without losing value over time. As a unit of account, demand deposits provide a standard measure of value for goods and services, facilitating price comparisons and financial planning. 

• Furthermore, they are highly liquid, meaning they can be quickly and easily converted into cash, providing flexibility and convenience for account holders. These characteristics make demand deposits an integral part of the money supply.

8. Specify the conditions of credit. Which four terms apply to credits? Provide Examples.

Ans:

• The terms of credit refer to the conditions under which a loan is provided, encompassing four main components: the principal amount, the interest rate, the collateral, and the repayment schedule. 

• For example, if a farmer borrows Rs. 50,000 (principal amount) at an annual interest rate of 10%, the bank might require the farmer to pledge their tractor as collateral. 

• The repayment schedule could be set to monthly instalments over two years. These terms ensure that both the lender and the borrower understand the loan's conditions, the cost of borrowing, and the consequences of default.

9. In your opinion, what would happen if every depositor went to get their money at the same moment?

Ans:

• If all depositors went to ask for their money at the same time, it would likely result in a bank run. A bank run occurs when a large number of customers withdraw their deposits simultaneously due to concerns about the bank's solvency. 

• Banks typically do not keep all depositors' money in cash reserves; instead, they lend a significant portion to borrowers. Consequently, the bank may not have enough liquid cash on hand to fulfil all withdrawal requests at once. 

• This situation can lead to the bank's financial instability and potentially cause it to collapse. Additionally, a bank run can trigger panic among other depositors and spread to other banks, leading to a broader financial crisis.

10. Describe what is meant by "collateral." Why do lenders require collateral to make loans?

Ans: Collateral is an asset or property that a borrower offers to a lender as security for a loan. If the borrower fails to repay the loan, the lender has the right to seize the collateral to recover the outstanding amount. Collateral can include items like real estate, vehicles, savings accounts, or other valuable assets.

Reasons Why Lenders Ask for Collateral:

1. Collateral reduces the lender's risk by providing a form of security. If the borrower defaults, the lender can sell the collateral to recoup the loan amount.

2. Offering collateral often indicates that the borrower is serious and financially responsible, improving their creditworthiness in the eyes of the lender.

3. Loans backed by collateral generally come with lower interest rates because the lender's risk is reduced.

4. With collateral, borrowers can often secure larger loan amounts than they could with unsecured loans.

11. Discuss the reasons why low-income rural residents still typically obtain loans from unofficial lenders that have exorbitant interest rates.

Ans:

• Many rural areas lack adequate banking infrastructure, making it difficult for people to access formal credit sources such as banks and cooperatives.

• Informal lenders, such as moneylenders and friends, typically do not require collateral, making it easier for poor people who do not have valuable assets to secure a loan.

• Obtaining a loan from informal sources is often quicker and involves less paperwork and fewer formalities compared to banks, which is important in emergencies.

• Informal lenders may offer more flexible repayment terms, accommodating the borrower’s ability to pay, unlike the rigid schedules of formal institutions.

• Borrowers may have established relationships with informal lenders, which can lead to a sense of trust and immediate assistance without bureaucratic hurdles.

• Many rural poor lack awareness or understanding of formal financial systems and the benefits they offer, leading them to rely on traditional, familiar sources of credit.

12. How do you refer to the terms of credit?

Ans:

The terms of credit refer to the specific conditions under which a lender provides a loan to a borrower. These conditions outline the obligations of both parties and detail the following key components:

1. Principal Amount: The total amount of money that is being borrowed.

2. Interest Rate: The cost of borrowing the principal amount, typically expressed as a percentage of the principal per year.

3. Collateral: An asset that the borrower pledges to the lender as security for the loan. If the borrower fails to repay the loan, the lender can seize the collateral.

4. Repayment Schedule: The timeline for repaying the loan, including the frequency and amount of each payment.

13. Does the fact that a lot of individuals in our nation live in poverty in any way impact their ability to borrow money?

Ans:

• Poor individuals often do not have valuable assets to offer as collateral, making it difficult for them to secure loans from formal financial institutions that require collateral to mitigate risk.

• Financial institutions assess the creditworthiness of borrowers based on their income, employment stability, and credit history. Poor individuals often have irregular incomes and limited or no credit history, which can result in low creditworthiness and difficulty in obtaining loans.

• Even when poor individuals can access credit, they are often charged higher interest rates due to the perceived higher risk of lending to them. This can make borrowing more expensive and less accessible.

• Poor people, especially in rural areas, may have limited access to banks and formal financial institutions due to inadequate banking infrastructure, lack of awareness, and financial illiteracy.

• Due to the challenges in accessing formal credit, poor individuals often rely on informal lenders, such as moneylenders, who charge exorbitant interest rates and may have exploitative practices.

• Poor borrowers often receive only small, short-term loans, which may not be sufficient for significant investments or long-term needs, further limiting their financial opportunities.

14. Describe two factors that make inexpensive and accessible credit important to the nation's progress.

Ans:

1. Boosts Economic Growth:

• Business Expansion: Affordable loans help businesses grow by allowing them to buy new equipment, hire more workers, and increase production, which boosts the economy.

• Encourages Startups: Easy access to credit helps people start new businesses, leading to innovation and more jobs.

2. Reduces Poverty and Inequality:

• Better Opportunities: Cheap credit lets low-income families afford education, healthcare, and housing, improving their lives and reducing poverty.

• Empower Marginalised Groups: Affordable loans give women and rural communities the chance to start businesses and become financially independent, helping to reduce inequality.

15. How do official and informal sources of credit differ from one another?

Ans:

• Formal and informal sources of credit differ significantly. Formal sources, such as banks and cooperatives, are regulated by authorities like the Reserve Bank of India (RBI), ensuring lower and consistent interest rates, extensive documentation, and collateral requirements. 

• They provide larger loan amounts with clear terms but are less accessible in rural areas. In contrast, informal sources, such as moneylenders and friends, operate without regulation, often charging higher and variable interest rates. 

• They require minimal documentation and no collateral, offering quick and flexible loans, especially in rural or underserved areas where formal banking facilities are limited. 

• These differences highlight the trade-offs between security and accessibility in borrowing.

16. Is it necessary for an oversight body, like the Reserve Bank of India, to investigate the lending practices of unofficial lenders? Why would it be such a challenging task?

Ans:

• Lack of Regulation: Informal lenders operate outside the formal financial system and are not registered or regulated, making it challenging to monitor their activities and enforce regulations.

• Widespread and Dispersed: Informal lending is prevalent in many rural and remote areas, with lenders dispersed across vast regions. This geographical spread makes it difficult for a central authority to track and oversee all lending activities.

• Informal Agreements: Transactions with informal lenders are often based on personal relationships and verbal agreements, leaving little to no paper trail or formal documentation for regulators to review.

• Cultural and Social Barriers: In many communities, informal lending is deeply ingrained in local customs and practices. Introducing regulation could face resistance and require significant changes in social attitudes and behaviours.

• Resource Intensive: Supervising informal lending would require substantial resources, including manpower, funding, and infrastructure, to effectively monitor, enforce regulations, and provide support in remote areas.

17. Why, in your opinion, do wealthier households have a larger percentage of formal sector credit than impoverished households?

Ans:

• Richer households typically possess valuable assets and collateral, such as property and savings, which they can use to secure loans from formal institutions. Poorer households often lack such assets, making it difficult to meet the collateral requirements of banks and other formal lenders.

• Financial institutions assess creditworthiness based on income stability, credit history, and financial records. Richer households generally have higher and more stable incomes, better credit histories, and comprehensive financial documentation, making them more attractive to formal lenders.

• Richer households are more likely to have access to banks and other formal financial services. They often live in urban areas with better banking infrastructure, whereas poorer households, especially in rural areas, may have limited access to formal financial institutions.

• Richer households tend to have higher levels of financial literacy, and understanding of the processes and benefits of formal credit. They are more aware of different financial products and services, and how to navigate the formal banking system. Poorer households may lack this knowledge, leading to a reliance on informal credit sources.

• The formal lending process involves extensive paperwork, stringent eligibility criteria, and lengthy approval processes, which can be cumbersome for poorer households. Richer households are better equipped to handle these administrative requirements.

• Formal financial institutions perceive lending to richer households as less risky compared to lending to poorer households, who may have unstable incomes and a higher likelihood of default. This risk perception results in more favourable lending terms and a greater share of credit for richer households.

18. How do banks act as a middleman between people who need money and those who have extra?

Ans:

• Banks mediate between those who have surplus money and those who need money through a process known as financial intermediation. Individuals and businesses with surplus funds deposit their money into bank accounts, such as savings or fixed deposits, where banks offer interest to attract these deposits. 

• Banks pool these deposited funds together, creating a large capital base that can be lent out. They then provide loans to individuals, businesses, and governments who need money for various purposes like purchasing homes, expanding businesses, or funding projects. 

• Borrowers repay these loans with interest, which is set higher than the interest paid on deposits, allowing banks to earn profit through the interest rate spread. Banks assess the creditworthiness of borrowers to minimise the risk of default and ensure that loans are granted to those likely to repay. 

• Additionally, banks maintain a portion of deposits as reserves to meet withdrawal demands, ensuring liquidity for depositors. This efficient allocation of funds supports economic activity, investment, and growth, highlighting the important role banks play in the financial system.

19. What is the meaning of the term "demand deposit" for bank deposits? Describe the benefits of making deposits at banks.

Ans:

• Deposits in banks are called demand deposits because they can be withdrawn by the depositor at any time without prior notice, providing high liquidity. The advantages of bank deposits include safety and security, as banks protect money from theft and loss, and the ability to earn interest on the deposited funds. 

• Bank accounts offer convenience through easy access via ATMs, online banking, and cheques, facilitating smooth financial transactions. They also help in record-keeping, providing detailed statements of all transactions. 

• Additionally, maintaining deposits can build a relationship with the bank, making it easier to obtain loans and credit. Overall, demand deposits offer liquidity, security, and financial benefits, making them essential for managing personal and business finances.

20. Examine how credit contributes to development.

Ans:

• Credit plays an important role in development by providing the financial resources needed for economic growth, entrepreneurship, and infrastructure projects. It enables businesses to invest in new technologies, expand operations, and create jobs, fostering innovation and competition. 

• Credit also helps alleviate poverty by allowing individuals to invest in income-generating activities, such as small businesses and agriculture, and supports human capital development through education loans. 

• Additionally, credit facilitates financial inclusion, ensuring more people have access to financial services, which helps reduce income inequality and promotes sustainable development. Overall, credit is essential for enhancing productivity, improving livelihoods, and driving comprehensive economic progress.

21. Manav needs a loan to launch a small company. What criteria will Manav use to determine whether to borrow money from a moneylender or a bank? Talk about it.

Ans:

• Manav will decide whether to borrow from the bank or the moneylender based on several factors. Banks generally offer lower interest rates and structured repayment terms but require collateral and have a lengthy approval process involving extensive documentation and credit checks. 

• If Manav has good credit and valuable assets to pledge, a bank loan might be advantageous due to its lower cost and legal safeguards. Conversely, moneylenders provide quicker access to funds with less stringent requirements and may not require collateral, which can be beneficial if Manav needs immediate cash or lacks significant assets. 

• However, moneylenders often charge higher interest rates, making loans more expensive in the long run and potentially exposing Manav to higher risks due to less regulatory oversight. Therefore, Manav will need to consider his financial situation, urgency, collateral availability, and risk tolerance to make an informed decision.

22. Give instances of the various ways that money is utilised as a means of trade. Describe.

Ans:

1. Purchasing Goods: When you go to a grocery store and buy vegetables, fruits, or other items, you use money to pay for these goods. The store accepts money in exchange for the products you want, making the transaction simple and efficient.

2. Paying for Services: If you hire a plumber to fix a leak in your house, you pay them money for their services. This exchange of money for service ensures that the plumber receives compensation for their work.

3. Salary Payments: Employees receive their salaries in the form of money. This money can then be used to purchase goods and services, pay bills, and save for future needs. Employers use money to compensate employees for their time and effort.

4. Online Shopping: When you buy products online, you use digital money through credit cards, debit cards, or electronic wallets. The online retailer receives the money and ships the purchased items to you.

5. Transportation: Using public transportation, such as buses or trains, involves paying money for a ticket. This money facilitates your travel from one place to another.

23. What is the fundamental tenet of the SHGs for the impoverished? Give a personal explanation.

Ans:

• The basic idea behind Self Help Groups (SHGs) for the poor is to create a small, supportive community of individuals who pool their savings, access credit, and improve their financial stability. 

• Typically consisting of 10-20 members from the same village or neighbourhood, SHGs meet regularly to save money and discuss their financial needs. 

• These groups provide an alternative to traditional banks and moneylenders, offering easy access to credit without the need for collateral, which is important for the poor who often lack assets. 

• SHGs empower members by promoting self-reliance and decision-making skills, as they collectively decide on the use of funds, interest rates, and repayment schedules. 

• Additionally, SHGs offer social support, enabling members to share experiences and provide emotional backing, while also providing training in financial literacy and entrepreneurship to enhance income opportunities and improve living standards.

24. What is the primary unofficial credit source in India for households living in rural areas?

Ans:

• The main informal source of credit for rural households in India is moneylenders. 

• Moneylenders play a significant role in providing credit to rural communities due to their accessibility and willingness to lend without the stringent requirements of formal financial institutions. 

• They offer loans quickly and with minimal documentation, which is important for rural households that may lack collateral or formal credit histories. 

• Despite charging high interest rates, moneylenders remain a primary source of credit because they are deeply embedded in the rural financial landscape and can offer flexible terms that cater to the immediate needs of borrowers.

25. What does the term "barter system" mean?

Ans:

• The barter system is an ancient method of exchange where goods and services are traded directly for other goods and services without using money. In this system, individuals or groups swap items they have in surplus for items they need, based on mutual agreement. 

• For example, a farmer might trade a certain amount of grain for a tailor's sewing services. The main challenge with the barter system is the requirement for a "double coincidence of wants," meaning both parties must have what the other desires at the same time, making transactions less efficient compared to using money as a medium of exchange.

26. Describe, using examples, how individuals interact with banks.

Ans:

• People are involved with banks in various ways, utilising their services for everyday transactions, savings, loans, and investments. Individuals and businesses open savings and current accounts to securely deposit money and manage their finances. 

• For example, a salaried employee deposits their monthly earnings into a savings account, while a business uses a current account for frequent transactions. 

• People also take out loans and mortgages from banks for purposes like buying homes, financing education, or starting businesses. Credit and debit cards issued by banks facilitate cashless transactions, such as purchasing groceries or paying bills. 

• Individuals invest in fixed deposits and other financial products offered by banks to grow their savings. The convenience of online and mobile banking allows people to manage their accounts, transfer money, and pay bills remotely. 

• Banks also provide insurance products and wealth management services, helping individuals protect their assets and plan for the future. Through these various interactions, banks play a crucial role in helping people manage their financial needs and goals.

Important Topics of Class 10 Money and Credit Important Questions 

Money and Credit Class 10 Important Questions and Answers covers topics such as the functions of money, the role of banks, types of credit, and the impact of credit on development. 

Benefits of Learning with Class 10 Economics Chapter 3 Important Questions

Studying the important questions from Money and Credit Class 10 offers students several benefits.

• Having a compilation of important questions and answers helps students focus their revision on key concepts and topics, ensuring they cover all essential areas effectively.

• Practising important questions enhances students' readiness for exams by familiarising them with the types of questions likely to be asked, helping to improve their confidence and performance.

• The questions and answers format helps reinforce students' understanding of complex topics like the functions of money, the role of banks, and the impact of credit on the economy.

• Regular practice with Money And Credit Class 10 Important Questions and Answers helps in better retention of information, as students repeatedly engage with the material in a structured manner.

Conclusion 

Class 10 Money and Credit Important Questions provides a focused and efficient way to revise key concepts, enhances exam preparation, and improves understanding of complex topics such as money's functions, banks' role, and credit's impact. Money And Credit Class 10 Important Questions and Answers in time management, self-assessment, and retention of information, fostering critical thinking and application of knowledge.

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