NCERT Solutions for Class 10 Economics Chapter 3 Money and Credit

NCERT Solutions for Class 10 Social Science Economics Chapter 3 Money and Credit are provided here. With these solutions, you will learn the right way to write answers to the questions perfectly in exams. We have updated the NCERT Solutions for Class 10 Economics Chapter 3 Money and Credit for the current session so that you can easily score high marks in the exams. You can also download PDF of the solutions and use them whenever you are offline.

Class 10 Social Science Economics Chapter 3 NCERT Solutions

Question 1. In situations with high risks, credit might create further problems for the borrower. Explain.

Answer: In situations with high risks, credit might create further problems for the borrower. Credit involves a certain amount of loan that is taken by a borrower from a lender at a high-interest rate. In case there is a failure, and the borrower faces loss, then he further falls in the trap of credit. This is known as a debt trap. The borrower has to repay the credit along with interest applied by the lender, and he further falls into the trap of credit, increasing the problems for the borrower. The borrower also has to sell a part of his or her land to repay the loan.

Question 2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.

Answer: In a barter system where goods are directly exchanged without the use of money,the double coincidence of wants is an essential feature. By serving as a medium of exchanges, money removes the need for double coincidence of wants and the difficulties associated with the barter system. For example, it is no longer necessary for the farmer to look for a book publisher who will buy his cereals at the same time sell his books. All he has to do is find a buyer for his cereals. If he has exchanged his cereals for money, he can purchase any goods or service which he needs. This is because money acts as a medium of exchange.Medium of exchange is one of the three fundamental functions of money in mainstream economics. It is a widely accepted token which can be exchanged for goods and services.

Question 3. How do banks mediate between those who have surplus money and those who need money?

Answer: Banks mediate between those who have surplus funds (the depositors) and those who are in need of funds (the borrowers) by lending money to people who are in need. People can open accounts in banks and banks make use of that money to fulfil the loan requirements of the people. A higher interest rate is charged for the borrower and that profit is given to the depositor as interest for offering deposits.

Question 4. Look at a 10 rupee note. What is written on top? Can you explain this statement?

Answer: “Reserve Bank of India” and “Guaranteed by the Central Government” is written on the top of a 10 rupee note. Currency in India is issued by the central bank of the country, in the case of India, the Reserve Bank of India is the central bank of the country. This currency is issued on behalf of the central government, and these two are the only authorities which are responsible for issuing notes and currency in India.

Question 5. Why do we need to expand formal sources of credit in India?

Answer: We need to expand formal sources of credit in India due to:

To reduce dependence on informal sources of credit because the latter charge high interest rates and do not benefit the borrower much.
Cheap and affordable credit is essential for country’s development. The formal sector still meets only about half of the total credits needs of the rural people.
Banks and co-operatives should increase their lending, particularly, in rural areas. Rural borrowers depend on informal sources like moneylenders who charge them a high rate of interests, which can sometimes land them into a debt- trap.
This would lead to higher incomes and many people will be able to borrow cheaply for a variety of needs. They will be able to grow crops, do business, set up small scale industries etc.

Question 6. What is the basic idea behind the SHGs for the poor? Explain in your own words.

Answer: The basic behind the SHGs is to provide a financial resource for the poor through organizing the rural poor especially women, into small Self Help Groups. They also provide timely loans at a responsible interest rate without collateral. Thus, the main objectives of the SHGs are:

To organize rural poor especially women into small Self Help Groups. A typical SHGs has 15-20 members.
To collect savings of their members.
To provide loans without collateral.
To provide timely loans for a variety of purposes.
To provide loans at responsible rate of interest and easy terms.
Provide a platform to discuss and act on a variety of social issues such as education, health, nutrition, domestic violence etc

Question 7. What are the reasons why the banks might not be willing to lend to certain borrowers?

Answer: The banks might not be willing to lend certain borrowers due to the following reasons:

Banks require proper documents and collateral as security against loans. Some persons fail to meet these requirements.
The borrowers who have not repaid previous loans, the banks might not be willing to lend them further.
The banks might not be willing to lend those entrepreneurs who are going to invest in the business with high risks.
One of the principal objectives of a bank is to earn more profits after meeting a number of expenses. For this purpose, it has to adopt a judicious loan and investment policies which ensure fair and stable return on the funds.

Question 8. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

Answer: The Reserve Bank of India supervises the functions of banks in the following ways:

It monitors the banks in actually maintaining cash balance.
It ensures that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc.
banks have to submit information to the RBI on their credit activities like how much they are lending, to whom, at what interest rate, etc.

This is necessary to ensure equality in the economy of the country and protect especially small depositors, farmers, small scale industries, small borrowers etc. Further, RBI monitoring ensures that banks do not loan more than they are supposed to, as such an action can create a crisis situation. Great Depression of 1930 is an example of such a crises situation.

Question 9. Analyse the role of credit for development.

Answer: Credit is one of the most major aspects of the development of a country. Affordable credit plays a very important role in the country’s development. People need loans for different reasons and to meet this requirement credit is very important. In India, a major part of the population is engaged in agricultural activities; credit plays a very crucial role in agricultural activities. People can borrow money and use modern farming methods to grow crops which are more reliable than the traditional methods of growing crops. Apart from this, there are small scale industries, business and various other sectors where credit can help people and ultimately result in the development of the country.

Question 10. Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss.

Answer: Manav will decide whether to borrow from the bank or the money lender on the basis of the following terms of credit:

Rate of interest
Requirements availability of collateral and documentation required by the banker.
Mode of repayment. The penalty in case of default in repayment.

Terms of repayment are different of bank and the money lender. Whichever he finds easier he can consider that. Depending on these factors and of course, easier terms of repayment, Manav has to decide whether he has to borrow from the bank or the moneylender.

Question 11. In India, about 80 per cent of farmers are small farmers, who need credit for cultivation.

(a) Why might banks be unwilling to lend to small farmers?
(b) What are the other sources from which the small farmers can borrow?
(c) Explain with an example of how the terms of credit can be unfavorable for the small farmer.
(d) Suggest some ways by which small farmers can get cheap credit.

Answer: (a) The banks might be unwilling to lend to small farmers because the farmers usually take crop loan at the beginning of the season and repay the loan after harvest. Repayment of loan is dependent on the income from farming. And in case of crop failure, repayment becomes impossible. In such cases, the recovery of loan from the small farmers becomes very difficult. The small farmers have to sell part of the land to repay the loan that is why banks do not want to give loans to small farmers.

(b) Apart from bank, the small farmers can borrow from local money lenders, agricultural traders, big landlords, cooperatives and SHGs etc.

(c) When a small scale farmer borrows money from a bank, he has to repay the amount at a fixed rate of interest. For example, if a farmer borrows money from the bank and during the harvest season his crops are ruined, then he shall not be able to repay the amount loaned him by the bank and will further fall into the debt trap.

(d) The small farmers can get cheap credit from different sources like – Banks, Agricultural Cooperatives, and SHGs.

Question 12. Fill in the blanks:

(i) Majority of the credit needs of the __________households are met from informal sources.
(ii) __________costs of borrowing increase the debt-burden.
(iii) __________issues currency notes on behalf of the Central Government.
(iv) Banks charge a higher interest rate on loans than what they offer on __________.
(v) __________is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.

Answer:
(i) Poor
(ii) High
(iii) Reserve Bank of India
(iv) Deposits
(v) Collateral

Question 13. Choose the most appropriate answer.

(i) In an SHG most of the decisions regarding savings and loan activities are taken by

(a) Bank.
(b) Members.
(c) Non-government organization.

Answer: (b) Members.

(ii) Formal sources of credit do not include

(a) Banks.
(b) Cooperatives.
(c) Employers.

Answer: (c) Employers