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. 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)
vi. 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)

vii. 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)

viii. 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)
ix. 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)

x. 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)

xi. 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:
i. Both parties have to agree to buy and sell each other’s
commodities.
ii. Valuation of all goods cannot be done easily.
iii. 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:
i. Modern currency is authorized by the government of the country.
ii. The law legalizes the use of rupees in India as a medium of
payment and it cannot be refused in doing transactions in India.
iii. 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:
i. This ensures the safety of money and they also earn interest from
the bank.
ii. Demand deposits can be withdrawn whenever the person wants.
It also allows payments to be made through cheque.
iii. Through cheques, the money gets directly transferred between
banks. So, no direct payment of cash needs to be made.
 iv. 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.
v. 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:
i. It helps to meet the ongoing expenses of production.
ii. It helps in increasing earnings and encourages people to invest in
agriculture, engage in business, and set up small industries.
iii. It helps in completing production on time.
iv. Cheap credit will end the vicious cycle of a debt trap.
v. Cheap and easy credit would inspire better investment in
technology and would increase competition.
Q. No. 11) 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. 12) 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. 13) What are the main terms of credit?

Ans. The main terms of credit are:
• Interest rate
• Collateral
• Documentation requirement
• Mode of repayment

Q. No. 14) ‘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. 15) 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 –
i. Can do the documentation required
ii. Can fulfill the terms of credit
iii. Bank can be assured of repayment of the loan by her through
EMIs from her salary.

Q. No. 16) Explain the significance of The Reserve Bank of India in the
Indian economy.
Ans. Significance of RBI in the Indian economy:
i. In India, the Reserve Bank of India issues currency notes on behalf
of the Central Government.
ii. It supervises the functioning of formal sources of loans.
iii. The banks maintain a minimum cash balance out of the deposits
they receive.
iv. The RBI monitors that the banks actually maintain the cash
balance.
v. 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.
vi. Periodically, banks have to submit information to the RBI on how
much they are lending, to whom, at what interest rate, etc.

Q. No. 17) 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:
i. The RBI monitors that the banks actually maintain the cash
balance.
ii. 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.
iii. 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. 18) 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, friends,

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

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

iii. No unfair means adopted to take back the money

iii. Unfair measures are adopted.
if no re-payment is done.

iv. Supervised by RBI. iv. Not supervised

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

•Self-help groups are an alternative source.

Q. No. 19) “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:
i. There is no organization to supervise the credit activities of
lenders in the informal sector.
ii. The informal sector lends at a very high rate of interest and uses
unfair means to get the money back.
iii. 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.
iv. 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. 20) Why do most rural households still remain dependent on
informal sources of credit?
Ans. Most rural households are still dependent on informal sources of credit
because:
i. Limited availability of Banks in rural areas.
ii. People in rural areas face problems with regard to
documentation.
iii. The absence of collateral is one of the major reasons which
prevents the poor from getting bank loans.
 iv. Rural people get easy loans from richer households through
informal ways.
v. Poor people can approach the moneylenders even without
repaying their earlier loans.
Q. No. 21) 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:
i. To save people from the exploitation of the informal sector
ii. To save and reduce the dependence on informal sources of credit
iii. Formal sources charge a low rate of interest on loans.
iv. Higher Income through cheap borrowing
v. To save from debt trap and exploitation.
vi. It provides cheap and affordable credit. Cheap and affordable
credit is crucial for the country’s development
vii. 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.
viii. It is important that formal credit is distributed more equally so
that the poor can benefit from cheaper loans.
Q. No. 22) 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. 23) Explain the role of Self-Help Groups (SHGs) in rural society.
Ans. The role of Self-Help Groups (SHGs) in rural society are:
 i. Members of SHGs can take small loans from the group itself to
meet their needs.
ii. The group charges less rate of interest on these loans.
iii. After a year or two, it becomes eligible for availing loan from the
bank.
iv. The group is responsible for the repayment of the loan.
v. Any case of non-repayment of a loan by any one member is
followed up seriously by other members of the group.
vi. The SHGs help borrowers overcome the problem of lack of
collateral.
vii. They can get timely loans for a variety of purposes and at a
reasonable interest rate.
viii. SHGs help women to become financially self-reliant.
ix. 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. 24) 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.