Money and Financial System

social science
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Here you will find all the questions, answers, notes, and solutions of chapter 17 Money and Financial System of Social Science for class 10 for students studying under Nagaland Board of School Education (NBSE). However, the study materials should be used only for references and nothing more. The notes can be modified/changed according to needs.

INTRODUCTION: Money is a part of our daily life. All people want money but only a few can define it. If you ask somebody ‘what is money?’, he will probably say ‘it is cash’, or may say ‘it is whatever you have got in your bank account’. Cash or the amount in bank is not the definition of money but at the most an alternative expression of money. Money does not do anything by itself. It is just a piece of paper or is simply an entry in your bank account. Money does not satisfy human wants directly. It satisfies wants indirectly only when it is spent. Money is not wanted for its own sake but for the things, it will buy.

In this chapter, you will get a more accurate understanding of money, how money makes transactions easy, the different institutions to borrow money from (credit) and what are the advantages and disadvantages that each of these institutions have.

I. Multiple Choice Questions

1. The system of exchanging goods for other goods is called

Answer: (c) Barter system

2. Currency notes in India are issued by

Answer: (c) RBI

3. Which of the following is not an informal source of credit?

Answer: (c) Chit funds

4. A Self-Help Group usually has

Answer: (c) 15-20 members

5. Majority of the credit needs of the poor households are met from

Answer: (b) Informal sources

6. Which of the following is not a modern form of money?

Answer: (c) silver coins

II. Very Short Answer Questions

1. What do you mean by the C-C economy?

Answer: The economic system based upon barter is known as Barter Economy or C – C Economy.

2. What was the main difficulty of the barter system?

Answer: The main difficulties of barter system are:

(i) Double coincidence of wants.
(ii) Lacks a common unit of value.

3. Define money.

Answer: Money is as an intermediate in the exchange process. Money is anything that the law accepts as a medium of exchange.

4. Name the two categories of financial institutions.

Answer: Two categories of financial institutions are:

i. Formal Financial Institutions.
ii. Informal Financial Institutions

5. Define credit.

Answer: Credit refers to an agreement reached between the lender and the borrower of money, goods or services in return for the promise of future payment.

6. What is meant by legal tender money?

Answer: Standard money is legal tender money. It is legal tender in the sense that no one can refuse to accept it.

III. Short Answer Questions

1. Why are demand deposits considered as money?

Answer: Banks accept demand deposits and provide cheque facility to their depositors. Thus, the modern forms of money currency and demand deposits close are linked to the working of the modern banking system. Thus, demand deposits at banks are money.

2. Mention the two functions that a financial institution must perform to become a commercial bank.

Answer: There are two essential functions that a financial institution must perform to become a commercial bank. These are:

(a) Acceptance of demand deposits that have cheque facilities.
(b) Lending.

IV. Long Answer Questions

1. State the differences between informal and formal sources of credit.

Answer: The differences between informal and formal sources of credit are as follows:

i. There is no organisation which supervises the credit activities of lenders in the informal sector, whereas, in the formal sector, there are governing agencies like Reserve bank of India.
ii. Lenders in the informal sector can lend at whatever interest rate they decide. On the other hand, the lenders in the formal sector have to abide by the predetermined interest rates.
iii. There is no one to stop lenders in the informal sector from using unfair means to get their money back, which is not possible in the formal sector because of the presence of government governing agencies.
iv. Compared to the formal lenders, most of the informal lenders charge a very high interest rate on loans which may vary from 24% to 60% per annum.
v. The objective of the formal sources is social welfare, while the main objective of informal sources is maximizing profit.
vi. Banks and cooperatives are examples of formal sources. On the other hand, moneylenders, traders etc. are examples of informal sources.

2. State any three advantages of formal sector loans.

Answer: Three advantages of formal sector loans are:

(i) Loans from banks and co-operatives are relatively much cheaper’ Interest rate remains around 8 to 12% per annum.
(ii) Mode of repayment of loan is very easy.
(iii) Formal credit saves the borrower from falling into debt-trap.

3. What is double coincidence of wants? Why it is not required in an economy where the money is in use?

Answer: Barter system requires double coincidence of wants. A seller has to find someone who wants to buy what he has, but the buyer must also have what the seller wants.

Money eliminates the need for double coincidence of wants. It is no longer necessary for the person who possesses produces rice to look for a sugar producer who will buy his rice and at the same time sell him sugar. All he has to do is to find a buyer of his rice in the market. Once he sells his rice for money, then he can purchase sugar or any other commodity from the market. Since money acts as an intermediate in the exchange process, it is called a medium of exchange.

4. Describe the evolution of money as a medium of exchange.

Answer: Currency notes and coins are the modern forms of money. But we find that money had appeared in different forms before taking the final form as we see it today. The historical origin of money can be traced back to the barter system that existed in olden days. In the initial stages, money took the form of commodity money. Due to several disadvantages of commodity money, precious metals like gold, silver, copper etc. began to be used as money. But on account of its bulkiness and safety, they were discontinued and led to the introduction of paper money. Nowadays, issue of paper money is the sole monopoly of the central bank of a country.

5. List any four non-institutional (informal) sources of finance in India. Why do poor households in India still depend on informal sources of credit?

Answer: Four non-institutional (informal) sources of finance in India are chit funds, private finance companies, moneylenders, traders.

The poor households are still dependent on informal sources of credit. It is because banks are not found everywhere in rural areas and bank loans require proper documentation and collateral. Lack of collateral is perhaps the major reason which prevents the poor households from availing bank loans. Further, local moneylenders remain willing/ready to offer loans without security. The borrower can approach the moneylender even in the state of non-payment of earlier loan.

4. Describe the functioning of SHGs in India.

Answer: A Self Help Group (SHG) has 15-20 members belonging to one neighbourhood and they are formed with the objective of helping poor borrowers overcome the problem of lack of security. The members of the group meet and save regularly. They save from Rs 25 to 100 or more per member. Members can avail small loans from the group to meet their needs. The group charges a reasonable rate of interest. If the SHG is regular in its savings, it becomes eligible for bank loans. The SHG decides regarding loans – the purpose and amount, interest rate, mode of repayment etc. It is the group which is responsible for the repayment of the loan.

Get notes of other chapters of NBSE class 10 social science.

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