Money and Credit Extra Question Answer

Question-1
What are the transactions involving money ?

Solution:
The transactions involving money are :
1) Goods are being bought and sold with the use of money.
2) Services are being exchanged with money.
3) Goods are also bought with a promise to pay money later.
4) Money is sometimes paid as advance with the promise of delivery of goods later.
Question-2
What were the objects that were used before the use of currency?
Solution:
As the need for a medium of exchange (currency) became a necessity different
materials were used as currency. Initially Indians used grains and cattle as money.
Before the introduction of coins, a variety of objects was used as money. Thereafter
came the use of metallic coins — gold, silver, copper coins — a phase which
continued well into the last century.
Question-3
What are Demand Deposits?
Solution:
People with extra money deposit it in the banks by opening a bank account in their
name. Banks accept the deposits and also pay an interest rate on the deposits. In
this way people’s money is safe with the banks and it earns an 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Since the deposits in the bank accounts can be withdrawn on demand, these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.
Question-4
What is a cheque?
Solution:
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.
Question-5
What is Collateral ?
Solution:
Collateral is an asset that the borrower owns (such as land, building, vehicle,
livestock, deposits with banks) and uses this as a guarantee to a lender until the loan
is repaid.
Question-6
What is called the ‘terms of deposit’ ?
Solution:
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.
Question-7
How do cooperatives function?
Solution:
Cooperatives have many members. It accepts deposits from its members. With
these
deposits as collateral, the Cooperative obtains a large loan from the bank. These
funds are used to provide loans to its members. Once these loans are repaid,
another round of lending takes place
Question-8
Cheap and affordable credit is crucial for the countries development . Discuss.
Solution:
Cheap and affordable credit is crucial for the country’s development. The various
types of loans or credits can be grouped as formal sector loans and informal sector
loans. Among the former are loans from banks and cooperatives. The informal
lenders include moneylenders, traders, employers, relatives and friends.
Banks and cooperatives give loans on a lesser interest rate than the informal sector.
But bank loans require proper documents and collateral. Absence of collateral is one
of the major reasons why bank loans are not available to small farmers and people
who wish to start small industries.
Compared to the formal lenders, most of the informal lenders charge a much higher
interest on loans. Thus, the cost to the borrower of informal loans is much higher.
Higher cost of borrowing means a larger part of the earnings of the borrowers is
used to repay the loan.
For these reasons, banks and cooperative societies need to lend more to the poorer
section of people . This would lead to higher incomes and many people could then
borrow cheaply for a variety of needs. They could grow crops, do business, set up
small-scale industries etc. They could set up new industries or trade in goods.
At present, it is the richer households who receive credit from formal sources
whereas the poor have to depend on the informal sources. It is essential that the
total formal sector credit increases so that the dependence on the more expensive
informal credit becomes less. Also, the poor should get a much greater share of
formal loans from banks, cooperative societies etc. Both these steps are important
for development.
Question-9
What is the barter system and double coincidence of wants?
Solution:
In the olden days, when modern currency was not in vogue, people had to sell and
buy each others commodities. This was called the barter system. For instance if a
shoe manufacturer wants to buy wheat, he has to find a farmer who wants to buy his
shoes in exchange for the wheat. That is, both parties have to agree to sell and buy
each others commodities. This is known as double coincidence of wants. In a barter
system where goods are directly exchanged without the use of money, double
coincidence of wants is an essential feature.
Question-10
What are ‘demand deposits’?
Solution:
People need only some money for their day-to-day needs. So, people deposit the
extra money with the banks by opening a bank account in their name. Banks accept
the deposits and also pay an interest rate on the deposits. In this way people’s
money is safe with the banks and it earns an 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.
Question-11
Write a short note on ‘cheques’.
Solution:
A deposit in a Bank offers the customer the facility of issuing cheques. 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. The recipient of the cheque can
deposit it in his own account in his bank. The money is transferred from one bank
account to another bank account in a couple of days. The transaction is complete
without any payment of cash. This is a safe mode of transferring money avoiding the
possibility of any theft.
Question-12
Write about the functioning of Krishak Cooperative society.
Solution:
Krishak Cooperative functions in a village not very far away from Sonpur. It has 2300
farmers as members. The Cooperative accepts deposits from its members. Using
the deposit as collateral, the Cooperative obtains a large loan from the bank. The
loan amount received from the bank is used as funds to provide loans to the
members.
Once the members repay the loans the amount is repaid to the bank and a fresh
loan is taken from the bank. The Cooperative provides loans to its members for the
purchase of agricultural implements, loans for cultivation and agricultural trade,
fishery loans, loans for construction of houses and for a variety of other expenses.

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Question-1

What are the transactions involving money ?

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