Money and Credit Class 10 Extra Questions and

Answers
Q. No. 1) Multiple Choice Questions (MCQs)

i. A porter making pots, wants to exchange pots for wheat. Luckily, he meets a
farmer who has wheat and is willing to exchange it for pots. What is this
situation known as?

a. Incidence of wants

b. Double incidence of wants

c. Barter system of wants

d. None of the above

Ans. Option (b)

ii. What is the primary function of money?

a. Medium of exchange

b. Standard of deferred payments

c. Credit creation

d. All of the above

Ans. Option (a)

iii. Find the Incorrect option

a. Demand deposit share the essential features of money

b. With demand deposit payments can be made without cash

c. Demand deposits are a safe way of money transformation

d. Demand deposit facility is like a cheque

Ans. Option (d)

iv. Credit (loan) refers to an agreement in which the lender supplies the
borrower with money, goods, or services in return for the promise of _____.

a. Future payment
b. Payment made

c. No payment

d. Collateral

Ans. Option (a)

v. Rehman is a poor agricultural labor and needs a loan for cultivation on his
small piece of land.

Which of the following would DEFINITELY offer him a fair interest rate and
flexible terms of credit?

a. village moneylender

b. cooperative society

c. commercial bank

d. rich landowner

Ans. Option (b)

vi. Which one of the following options describes ‘Collateral’?

a. Double coincidence of wants

b. Certain products for barter

c. Trade in barter

d. Asset as a guarantee for a loan

Ans. Option (d)

vii. Rohan has taken a loan of Rs.5 lakhs from the bank to purchase a house at
a 12% rate of interest. He has to submit papers about the new house and
salary records to the bank. What is this process called?

a. Interest Rate

b. Collateral

c. Principal Amount

d. Installments

Ans. Option (b)

viii. Rita has taken a loan of Rs.7 lakhs from the bank to purchase a car. The
annual interest rate on the loan is 14.5 percent and the loan is to be repaid in
3 years in monthly installments. The bank retained the papers of the new car
as collateral, which will be returned to Rita only when she repays the entire
loan with interest.

Analyze the loan information given above, considering one of the following
correct options.

a. Mode of re-payment

b. Terms of credit

c. Interest on loan

d. Deposit criteria

Ans. Option (b)

ix. Mohan is an agricultural laborer. There are several months in a year when
he has no work and needs credit to meet his daily expenses. He depends upon
his employer, the landowner for credit who charges an interest rate of 5
percent per month. Mohan repays the money by working physically for the
landowner on his farmland. Over the years his debt will –

a. Increase - because of increasing interest and non-payment of the monthly

amount

b. Remain constant - as he is working for the employer but is repaying less

c. Reduce - as the amount equivalent to his salary is being counted as monthly

repayment

d. Be totally repaid - as he is repaying the debt in the form of physical labor

Ans. Option (a)

x. Most agricultural laborers like Mohan depend upon loans from the informal
sector. Which of the following statements about this sector is correct –

a. There is govt. bodies to supervise the informal sector

b. Money lenders ask for a reasonable rate of interest

c. Cost of informal loans to the borrower is quite high

d. Money lenders use fair means to get their money back

Ans. Option (c)

xi. In India, who issues the currency notes on behalf of the central
government?

a. Reserve Bank of India

b. State Bank of India

c. Finance Minister of India

d. None

Ans. Option (a)

xii. In SHGs most of the decisions regarding savings and loan activities are
taken by _____.

a. Bank

b. Members

c. Government organization

d. LIC

Ans. Option (b)

Q. No. 2) What do you understand by the Double Coincidence of Wants?

Ans. The condition when both parties in a barter economy agree to sell and buy each
other’s commodities is known as a double coincidence of wants.

Q. No. 3) What is the Barter system? What are the limitations of the Barter system?

Ans. Barter system: It is a system in which goods, property, services, etc. are exchanged
for other goods without the use of money.

Limitations of the Barter system:

1. Both parties have to agree to buy and sell each other’s commodities.
2. Valuation of all goods cannot be done easily.
3. There are certain products that cannot be divided.
Q. No. 4) a. What is money? How does money eliminate the need for a double coincidence of wants?

b. Why is money called a medium of exchange?

Ans. a. Money is a medium of exchange that is widely accepted in transactions for goods
and services. It can take many forms, such as currency, coins, bank deposits, and digital
currency.
Money acts as an intermediate in the exchange process and thus eliminates the need for
a double coincidence of wants.

b. Money acts as an intermediate in the exchange process.

Q. No. 5) What are the two forms of modern currency? Why is the modern currency accepted as a medium of exchange?

Ans. Two forms of modern currency are

Paper notes

Coins

Modern currency is accepted as a medium of exchange because:

1. Modern currency is authorized by the government of the country.

2. The law legalizes the use of rupees in India as a medium of payment and it
cannot be refused in doing transactions in India.
3. In India, the Reserve Bank of India issues currency notes on behalf of the
government.
Q. No. 6) What are Demand Deposits? How is money safe in banks? Explain.

Ans. Demand deposits: The deposits in the bank accounts, which can be withdrawn on
demand, are called demand deposits.

Banks accept deposits from a number of people. Some part of that money is given out as
loans and the other part is kept with the banks for making payments. So, the money is
safe with the banks. The depositors can withdraw their money whenever they want.

Q. No. 7) How are deposits with the banks beneficial for an individual as well as for the nation? Explain with examples.

Ans. The benefits of deposits with the banks are:

1. This ensures the safety of money and they also earn interest from the bank.
2. Demand deposits can be withdrawn whenever the person wants. It also
allows payments to be made through cheque.
3. Through cheques, the money gets directly transferred between banks. So,
no direct payment of cash needs to be made.
4. Banks extend loans from the deposits they receive so they mediate between
people having surplus funds and people in need of more funds through
these deposits.
5. Since bank deposits are also white money, the nation’s economy is more
transparent.
Q. No. 8) What is a cheque?

Ans. A cheque is a paper instructing the bank to pay a specific amount from a person’s
account to the person in whose name the cheque has been issued.

Q. No. 9) How do the deposits with the banks become their source of income?

Or,

'Business is all about solving people's problems - at a profit.’

Explain how banks function like a business with respect to the above statement.
Ans.

 People have extra cash with them. Those having extra cash open a bank
account in their name and deposit the surplus money there.
 Out of the total money deposited with the banks, 15% of it is kept as a
minimum cash balance to pay to the depositors who might come to
withdraw money from the bank on any given day.
 Banks use a major portion of deposits to extend loans.
 They charge a higher rate of interest on loans than what they offer on
deposits.
 The difference between what is charged from borrowers and what is paid to
the depositors is the main source of income for the banks.
Q. No. 10) Why is credit a crucial element in economic development?

Or,

Why cheap and affordable credit is important for a country?

Ans. Credit is a crucial element in the economic development of a country because:

1. It helps to meet the ongoing expenses of production.

2. It helps in increasing earnings and encourages people to invest in
agriculture, engage in business, and set up small industries.
3. It helps in completing production on time.
4. Cheap credit will end the vicious cycle of a debt trap.
5. Cheap and easy credit would inspire better investment in technology and
would increase competition.
Q. No. 11) State the potential negative economic implications that would arise
in an economy in the absence of the concept of credit.

Ans.

 limited access to funds for starting businesses or making investments

 limited capacity of savings
 limited ability to finance education and skill development
 limited ability to purchase very high-worth items like cars, houses, etc.
 limited financial flexibility and convenience
Q. No. 12) Explain the meaning of the Debt Trap by giving an example.

Ans. A debt trap is a situation where an individual or organization becomes trapped in a

cycle of debt that they are unable to escape from. This typically occurs when the
borrower takes out a loan or credit but struggles to make the required payments due to
high-interest rates, fees, or other financial obligations. As a result, they are forced to
take on additional debt to meet their existing obligations, which can lead to a spiral of
increasing debt and financial distress.

For example, a small farmer Swapna took a loan for crop cultivation but due to some
reason, she faced a situation of crop failure. So she took another loan for spraying
pesticides but the production was not enough to repay the loan. So, she was caught in a
debt trap.

Q. No. 13) What do you mean by the term ‘collateral’? Why do banks ask for collateral while giving loans?
Ans. Collateral is an asset that the borrower owns (such as land, building, vehicle,
livestock, deposits with banks, etc.) and uses this as a guarantee to a lender until the
loan is repaid.

Banks use collateral as a guarantee until the loan is repaid. If the borrower fails to repay
the loan, the lender has the right to sell the asset or collateral to obtain payment.

Q. No. 14) What are the main terms of credit?

Ans. The main terms of credit are:

 Interest rate
 Collateral
 Documentation requirement
 Mode of repayment
Q. No. 15) 'A bank is a place that will lend you money if you can prove that you do not need it.' Justify the above

statement in relation to the banks' requirements to ensure the security of the funds they lend.

Ans.

 Every loan agreement specifies an interest rate that the borrower must pay
to the lender along with the principal amount.
 In addition, lenders may demand collateral against loans to ensure the
security of the money they lend.
 Collateral is an asset that the borrower owns and uses as a guarantee to a
lender until the loan is repaid.
 If the borrower fails to repay the loan, the lender has the right to sell the
asset or collateral to obtain payment.
 Interest rate, collateral, documentation requirement, time period, and mode
of repayment together comprise the terms of credit which can vary from
loan to loan.
Q. No. 16) Amrita is a government employee and belongs to a rich urban household whereas Rani works as a helper on a

construction site and comes from a poor rural household. Both have a crisis at home and wish to take loans. Create a list
of arguments explaining who between the two would successfully be able to get the loan from a formal source. Why?

Ans. Amrita would successfully get the loan from a formal source because –

1. Can do the documentation required

2. Can fulfill the terms of credit
3. Bank can be assured of repayment of the loan by her through EMIs from her
salary.
Q. No. 17) Explain the significance of The Reserve Bank of India in the Indian economy.

Ans. Significance of RBI in the Indian economy:

1. In India, the Reserve Bank of India issues currency notes on behalf of the
Central Government.
2. It supervises the functioning of formal sources of loans.
3. The banks maintain a minimum cash balance out of the deposits they
receive.
4. The RBI monitors that the banks actually maintain the cash balance.
5. The RBI sees that the banks give loans not just to profit-making businesses
and traders but also to small cultivators, small-scale industries, small
borrowers, etc.
 6. Periodically, banks have to submit information to the RBI on how much they
are lending, to whom, at what interest rate, etc.
Q. No. 18) In what ways RBI supervises the functioning of banks?

Ans. The working of the banks and cooperatives are supervised by the RBI in the
following manner:

1. The RBI monitors that the banks actually maintain the cash balance.
2. The RBI makes sure that the banks give loans not just to profit-making
businesses and traders but also to small cultivators, small-scale industries,
and other small borrowers.
3. Periodically, banks have to submit information to the RBI on how much they
are lending, to whom they are lending, at what interest rate, etc.
Q. No. 19) Compare and Contrast the conditions for taking loans from formal and informal sources. Suggest an

alternative source that you think is best for the rural poor.

Ans.

Formal Sources of Credit Informal Sources of Credit

i. Credit is provided by moneylenders,

i. Credit is provided by banks and cooperatives.
friends, relatives, etc.

ii. Rate of interest is low. ii. Rate of interest is high.

iii. No unfair means adopted to take back the money if no re-

iii. Unfair measures are adopted.
payment is done.

iv. Supervised by RBI. iv. Not supervised

v. Have to adhere to terms of credit i.e., collateral, rate of interest, v. Other conditions like cultivating land
mode of payment, and documents during harvest time, etc.

 Self-help groups are an alternative source.

Q. No. 20) “The credit activities of the informal sector should be discouraged.” Support the statement with arguments.

Ans. The credit activities of the informal sector should be discouraged because:

1. There is no organization to supervise the credit activities of lenders in the

informal sector.
2. The informal sector lends at a very high rate of interest and uses unfair
means to get the money back.
3. The higher cost of borrowing means a large part of the earnings of the
borrowers is used to repay the loan. Hence, the borrowers have less income
left for themselves.
4. Sometimes, due to a higher rate of interest, the amount to be repaid
becomes higher than the income of the borrower due to that there is always
a risk for borrowers to fall into a debt trap.
Q. No. 21) Why do most rural households still remain dependent on informal sources of credit?
Or

Describe circumstances that drive individuals to seek loans from informal

sources of credit.

Ans. Most rural households are still dependent on informal sources of credit because:

1. Limited availability of Banks in rural areas.

2. People in rural areas face problems with regard to documentation.
3. The absence of collateral is one of the major reasons which prevents the
poor from getting bank loans.
4. Rural people get easy loans from richer households through informal ways.
5. Poor people can approach the moneylenders even without repaying their
earlier loans.
Q. No. 22) Why do we need to expand formal sources of credit in India? Explain.

Or,

Why are formal sources of credit preferred over informal sources of credit? Give three reasons.

Or,

Why is it necessary that banks and co-operatives increase their lending in rural areas? Explain.

Ans. Formal sources of credit need to be expanded in India because:

1. To save people from the exploitation of the informal sector

2. To save and reduce the dependence on informal sources of credit
3. Formal sources charge a low rate of interest on loans.
4. Higher Income through cheap borrowing
5. To save from debt trap and exploitation.
6. It provides cheap and affordable credit. Cheap and affordable credit is
crucial for the country’s development
7. RBI also supervises the formal sector credit through various rules and
regulations which ensures that banks give loans to small cultivators, small
borrowers, etc., and not just to profit-making businesses and traders.
8. It is important that formal credit is distributed more equally so that the poor
can benefit from cheaper loans.
Q. No. 23) Imagine yourself to be XYZ, a member of a women Self- Help Group. Analyze the ways through which your

group provides loans to the members.

Ans.

 Self Help Groups pool their savings.

 A typical SHG has 15-20 members, usually belonging to one neighborhood,
who meet and save regularly.
 Saving per member varies from Rs. 25 to Rs. 100 or more, depending on the
ability of the people to save.
 Members can take small loans from the group itself to meet their needs.
 The group charges interest on these loans but this is still less than what the
moneylender charges.
 After a year or two, if the group is regular in savings, it becomes eligible for
availing loan from the bank.
Q. No. 24) Explain the role of Self-Help Groups (SHGs) in rural society.
Ans. The role of Self-Help Groups (SHGs) in rural society are:

1. Members of SHGs can take small loans from the group itself to meet their
needs.
2. The group charges less rate of interest on these loans.
3. After a year or two, it becomes eligible for availing loan from the bank.
4. The group is responsible for the repayment of the loan.
5. Any case of non-repayment of a loan by any one member is followed up
seriously by other members of the group.
6. The SHGs help borrowers overcome the problem of lack of collateral.
7. They can get timely loans for a variety of purposes and at a reasonable
interest rate.
8. SHGs help women to become financially self-reliant.
9. The regular meetings of the group provide a platform to discuss and act on a
variety of social issues such as health, nutrition, domestic violence, etc.
Q. No. 25) How do Self Help Groups help borrowers to overcome the problem of lack of collateral? Explain.

Ans.

 People can get timely loans for a variety of purposes and at a reasonable
interest rate.
 SHGs are regular in their savings which can be used as monetary help.
 Members can take small loans without collateral to meet their needs.
 Any case of non-repayment of a loan by any one member is followed up
seriously by other members of the group.
 Because of this feature, banks are willing to lend to poor women when
organized in SHGs, even though they have no collateral as such.
 Due to timely repayment, banks also lend loans to SHGs.