Money and Banking: SEBA Class 10 Economics (Social Science) answers

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Get here notes, textbook solutions, answers, MCQs, pdf, questions for Political Science and Economics (social science) chapter 1 Money and Banking of class 10 (HSLC) for students studying under the Board of Secondary Education, Assam (SEBA). These notes/answers, however, should only be used for references and modifications/changes can be made wherever possible.

Introduction

The evolution of money is an intriguing story. Money cannot be any commodity or substance. Certain characteristics must be present in money. Money can perform certain functions as a result of these characteristics. There are various types of money. Money is very important in the economic system. Money has eliminated the drawbacks of the barter system. Of course, money has its own set of issues. Money is created by the banking system. The Central Bank is in charge of all banks. The Reserve Bank of India is the country’s central bank. There are various types of banks, each with its own set of functions. Certain financial institutions exist outside of the country’s banking system. These are referred to as Non-Banking Financial Institutions (NBFIs) or Intermediaries. There are distinctions between banks and non-bank financial institutions.

Textual questions and answers

Very short answer type questions of Money and Banking

1. What is barter?

Answer: Barter is the direct exchange of commodities against commodities.

2. What is money?

Answer: According to Geoffrey Crowther anything that is generally acceptable to one and all as a medium of exchange is money.

3. Mention one important function of money.

Answer: One important function of money is money performs the function of a medium of exchange.

4. Give an example of non-legal tender money.

Answer: Cheque money is an example of non-legal tender money.

5. What is representative paper money?

Answer: When paper money is convertible into gold or silver of equivalent value then it is called representative paper money.

6. What is a bank?

Answer: Bank is a financial institution that deals in loans.

7. In which year was the Reserve Bank of India set up? 

Answer: The Reserve Bank of India was set up in 1935.

8. What is a current deposit?

Answer: Current deposit or savings is that kind of deposit that may be withdrawn by the depositor or saver at any time.

Short answer type questions of Money and Banking

1. How does the lack of double coincidence of wants create problems in the barter system?

Answer: The barter system is hampered by the double coincidence of wants. There will be no commodity exchange if one individual does not produce or has the commodity that the other individual desires. For example, if a person wants rice in exchange for sugarcane, but the other person with whom he is supposed to barter does not have rice, but instead has fish. Problems will arise in the barter system as a result of this.

2. What is meant by the store of value?

Answer: Value for goods and services is referred to as a store of value. Value is stored up in the sense that commodities are stored up so that the stored up commodity can be exchanged against other commodities as and when such a transaction is required. Some commodities, such as cloth and rice, have a higher store of value because they do not perish in a short period of time because they are stored up. Commodities such as eggs and fish, on the other hand, perish faster and have a lower store of value.

3. Which characteristic of money is the most important one and why?

Answer: The most important characteristic of money is Money must have general acceptability. This is the most important feature because general acceptability means acceptance by all. It is supported by the law of the land.

4. What is the liquidity of money?

Answer: Liquidity of money means direct and immediate convertibility of money into goods and services that the holder of money wants. The degree of liquidity of money is the maximum. Land, gold, silver etc also have liquidity but their liquidity is less than that of money as these are not directly or immediately convertible into goods and services.

5. ‘Money is the common unit of measurement of the value of goods and services.’ Explain.

Answer: Liquidity of money refers to the direct and immediate conversion of money into goods and services desired by the holder of money. Money’s liquidity is at its peak. Land, gold, silver, and other commodities have liquidity, but it is less than money’s because they are not directly or immediately convertible into goods and services.

6. What is the difference between limited and unlimited legal tender?

Answer: Limited legal tender money is money that is only acceptable up to a certain amount of transaction value. Transactions can be of either low or high value. Unlimited legal tender money, on the other hand, is money that can be used as a medium of exchange for transactions of any value.

7. What are the functions of Regional Rural Banks? 

Answer: The functions of Regional Rural Banks are:

i. To provide low-interest loans to the villagers and free them from the clutches of private money lenders who charge exorbitant interest rates.
ii. Mobilizing rural savings and investing them in a variety of productive activities.

8. How are the Non-Banking Financial Institutions different from the banks?

Answer: There are two main differences between Banks and Non-Banking Financial Institutions (NBFI):

i. Depositors in banks can withdraw funds via check; depositors in non-banking financial institutions cannot.
ii. There is a Deposit Insurance Scheme in place to protect depositors in the case of banks; such schemes do not exist in the case of non-banking financial institutions.

Long type questions of Money and Banking

1. Explain four demerits of the barter system.

Answer: Four demerits of the barter system are explained below:

i. Lack of double coincidence of wants: When there is a lack of double coincidence of wants, the barter system does not work. For example, suppose a person wants rice in exchange for sugarcane, but the other person with whom he is supposed to barter does not have rice but instead has fish. As a result, a problem will arise in the barter system.

ii. It lacks a common unit of account: The value of each commodity in the barter system must be expressed in terms of the value of another commodity. For instance, one apple is exchanged for three mangoes. Similarly, for other commodities to be exchanged in the market, it is impossible for the consumer to remember the various exchange rates.

iii. Indivisibility: When commodities are indivisible, the barter system is rendered ineffective. A piece of bread, for example, cannot be exchanged for an elephant. Because the elephant’s rate is much higher than the rate of bread, and the elephant is also not divisible. As a result, only the barter system works in the case of divisible items.

iv. It lacks a store of value of goods and services: Value is stored up in the barter system in the sense that the stored up commodity can be exchanged against other commodities as and when such a transaction is required. However, the issue is that commodities are perishable. Some perish sooner, such as eggs and fish, while others perish later, such as clothes and rice.

2. Explain any four characteristics of money.

Answer: Four characteristics of money are explained below:

i. Money must be widely accepted: Money must be widely accepted as a medium of exchange.
ii. Money must be cognizable: There should be no difficulty identifying money. Transactions will be difficult if money is not easily identifiable.
iii. Money must be durable: Because perishable commodities such as fish and eggs are perishable, they cannot be used as money. Money cannot be saved if it is perishable. There will be no store of value in that case, and saving will be impossible.
iv. Money must be divisible: High-value money must be convertible into low-value money. There is enough money to settle transactions of any size, large or small.

3. Explain four major functions of money.

Answer: Four major functions of money are explained below:

i. Money performs the function of a medium of exchange: Commodities are exchanged indirectly through money in a money economy. The person who produces rice will sell rice (the first transaction), and the money earned will be used to purchase cloth (second transaction). As a result, money becomes the medium of exchange.

ii. Money acts as a standard of measurement of values of goods and services: Prices exist for all economic goods. Price is the value in exchange expressed in terms of money. Money is the most widely used unit of measurement. Prices are the only way to express the value of all economic goods and services.

iii. Money acts as a standard of deferred payments: Deferred payments are payments made later rather than at the time the product or service is delivered to the customer. It accepts commodities on credit. All such payments are accounted for in monetary terms.

iv. Money functions as the store of value: Commodity money cannot be saved because it is not durable. Saving in the form of commodity money is not possible. One of the characteristics of money is its durability. Money can be used to store the value of goods and services.

4. Is cheque money? Give reasons for your answer. 

Answer: No, a cheque is not money.

A cheque is not considered legal tender. When the general acceptability of money as a medium of exchange is undermined by a lack of legal backing, it is referred to as non-legal tender money. A person may refuse to accept payment by cheque. There has been no violation of the law. A cheque is a monetary claim.

5. Mention four problems associated with money.

Answer: The following are four problems associated with money:

i. When money loses its value stability, a slew of problems can arise. For example, if the value of money continues to fall, consumers will have to spend more money in order to purchase the same amount of goods and services from the market.

ii. Money can be used as a tool to facilitate the concentration of economic power and wealth. Money can easily become a means of acquiring economic power in an economy where money is everything.

iii. A lack of money may be the root of the social value system’s demise. Corruption, irregularities, and various forms of injustice are the end results of degrading values.

iv. When money becomes black money, the economy suffers in a variety of ways. For example, large-scale tax evasion may cause the government to lose a significant amount of revenue.

6. Explain any four functions of the Central bank.

Answer: The following are four functions of the Central bank:

i. The Central Bank issues currency: This is the Central Bank’s monopoly right, as no other bank in the country has this right.

ii. The Central Bank is the bankers’ bank: The Central Bank audits all member banks’ accounts. When banks face a financial crisis, it is the Central Bank that steps in to assist them.

iii. The central bank acts as a clearing house for member banks, facilitating inter-bank lending and borrowing. The Central Bank is in charge of all member banks’ accounts. At the central banking level, all transactions between lending and borrowing banks are cleared.

iv. The central bank has a promotional role: it promotes socio-economic development by allocating funds to priority sectors of the economy. In India, for example, the Central Bank provides funds for the development of the agricultural sector.

7. Explain any two major functions of the commercial banks.

Answer: Two major functions of the commercial banks are explained below:

i. Savings are mobilised by the commercial bank: There are three types of savings: a) current savings or deposits, b) fixed savings or deposits, and c) savings deposits. The depositor may withdraw current savings or deposits at any time. Fixed deposits are non-transferable and cannot be withdrawn at any time. In the event of a withdrawal, prior notification is required. One part of a savings deposit can be withdrawn at any time, while the other part can only be withdrawn with the bank’s permission.

ii. Commercial banks provide loans: Many people, such as farmers, artisans, and industrialists, can apply for and receive loans from commercial banks. The proper use of bank loans improves the people’s economic situation.

8. Briefly explain any two functions of each of the following:

(i) IDBI
(ii) RRBs
(iii) NABARD
(iv) SIDBI

Answer: (i) IDBI: IDBI stands for Industrial Development Bank of India. Two functions of IDBI are:

i. IDBI provides industrial loans at a low-interest rate to businesses in underserved areas of the country.
ii. The IDBI promotes entrepreneurship through a variety of training programmes.

(ii) RRBs: RRB stands for Regional Rural Banks. The following are two functions of RRBs.

i. To provide low-interest loans to the villagers and free them from the clutches of private money lenders who charge exorbitant interest rates.
ii. Mobilizing rural savings and investing them in a variety of productive activities.

(iii) NABARD: NABARD stands for National Bank for Agriculture and Rural Development. Two main functions of NABARD are:

i. NABARD is the apex financial institution among all institutions involved in rural investment and production.
ii. NABARD simplifies the loan application process, monitors and evaluates the progress of various rural schemes, and organises training programmes for beneficiaries.

(iv) SIDBI: SIDBI stands for Small Industrial Development Bank of India. Two main functions of SIDBI are:

i. To encourage the modernization and application of advanced technology in small businesses.
ii. To develop markets for the products of small businesses.

Additional/extra questions and answers/solutions

1. What is a barter system?

Answer: The barter system is a system in which goods are directly exchanged for goods.

2. What is an exchange?

Answer: The term exchange can be simply understood as ‘give and take’.

3. What is money?

Answer: Money is a medium of exchange, a measure of value or a store of value.

4. What do you mean by money of account?

Answer: Money of account refers to the account in which all of a country’s sales and purchases of goods and services are recorded.

5. What is actual money?

Answer: Actual money is the money which circulates among the citizens of a country. 

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26. Write a brief note on the regional rural banks.

Answer: Agriculture is vital to the Indian economy as about 70% of India’s population lives in rural areas whose main livelihood depends on agriculture. Despite actively participating in development programmes, commercial banks are fundamentally profit-driven financial institutions. Therefore, in India, the rural bank scheme was implemented in 1976. In Assam, five regional rural banks were established in 1976 namely Lakhimi Gaonlia Bank, Pragjyotish Gaonlia Bank, Subansiri Gaonlia Bank, Cachar Gramin Bank, and Dihangi Gaonlia Bank. Regional rural banks established themselves as the banks of the poor and backward classes. Assam Gramin Vikash Bank absorbed the state’s regional rural banks in 2006.

27. Briefly mention the drawbacks of the co-operative movement in India. 

Answer: The co-operative societies Act was adopted in India in 1904 which laid the foundation of the co-operative movement in the country. Given below are the various reasons for the drawback of the cooperative movement in India.

i.  Village co-operative societies are financially insecure, with a meagre fund.
ii. The non-realisation of outstanding loans continues to rise.
iii In the absence of participation by the weaker sections, cooperative societies are formed among some wealthier and more influential persons in the society.
iv. Co-operative societies have failed to solve the problem of rural indebtedness.
v. In the absence of properly trained people, society’s management has been weak, corrupt, and motivated by personal interest.
vi. The lack of popularity is the root cause of the cooperative movement’s failure. If the cooperative movement in India is not popularised among the general public, its success is unlikely.

28. What is a development bank? Write two of its objectives.

Answer: Development banks are not a general type of bank. These banks specialise in providing economic and industrial development services. The development banks have two main goals i.e to provide banking services through credit extension and to promote economic development through a variety of other services.

29. Outline the primary functions of development banks.

Answer: The primary functions of development banks are as follows:

i. To provide medium and long-term credit to industries.
ii. To provide risky capital.
ii. To provide funding for new issues.
iii. To serve as a guarantee for short-term loans.
iv. To make arrangements for foreign exchange loans.

Extra/additional MCQs

1. What is the main problem when there is a lack of double coincidence of wants in a barter system?

A. Interdependence B. Exchange of goods C. Trading issues D. Production problems

Answer: C. Trading issues

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48. What is the unit of money in India?

A. Rupee B. Dollar C. Euro D. Yen

Answer: A. Rupee

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