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Money and Financial System: NBSE class 10 Social Science
Here you will find all the questions, answers, notes, and solutions of chapter 16 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.
If you notice any errors in the notes, please mention them in the comments
Summary
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 a 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 into 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 has.
Textual questions and answers
Multiple Choice Questions
1. Majority of the credit needs of the poor households are met from
(a) Formal sources (b) Informal sources (c) Self-Help groups (d) All of these
Answer: B. Informal sources
2. Which of the following is not a modern form of money?
(a) Paper notes (b) Demand deposits (c) Silver coins
Answer: C. Silver coins
3. Read the following statements – Assertion (A) and Reason (R). Choose one of the correct alternatives given below.
Assertion (A): The problem of double coincidence of wants was a major drawback of barter system.
Reason (R): Barter system involves exchange of goods and services.
(a) Both the Assertion (A) and Reason (R) are true, and the Reason is a correct explanation of the Assertion.
(b) Both the Assertion and Reason are true, but the Reason is NOT a correct explanation of the Assertion.
(c) The Assertion is true, but the Reason is false.
(d) The Assertion is false, but the Reason is true
Answer: B. Both the Assertion and Reason are true, but the Reason is NOT a correct explanation of the Assertion.
4. A woman in a village takes a loan from a local moneylender to pay for her child’s education. She repays the loan with high interest over time. What type of credit source is this woman using?
(a) Formal credit (b) Informal credit (c) International credit (d) Government credit
Answer: B. Informal credit
5. In ancient times, people used cattle, grain, and other commodities as a medium of exchange. What term best describes this form of money?
(a) Barter system (b) Commodity money (c) Fiat money (d) Digital currency
Answer: B. Commodity money
Very Short Answer Questions
1. What was the main difficulty of barter system?
Answer: The main difficulty of the barter system was the requirement for a double coincidence of wants.
2. Define money.
Answer: Money is defined as anything that is generally accepted as a means of exchange and simultaneously acts as a measure and a store of value.
3. Name the two categories of financial institutions.
Answer: The two categories of financial institutions are: (1) Formal Financial Institutions and (2) Informal Financial Institutions.
4. Define credit.
Answer: Credit refers to an agreement between a lender and a borrower, involving the exchange of money, goods, or services for a promise of future payment.
Short Answer Questions
1. Mention the two functions that a financial institution must perform to become a commercial bank.
Answer: The two essential functions that a financial institution must perform to become a commercial bank are:
(a) Acceptance of demand deposits that have cheque facilities.
(b) Lending.
Long Answer Questions
1. 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 a debt trap.
2. What is double coincidence of wants? Why it is not required in an economy where the money is in use?
Answer: The barter system requires a 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.
3. 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 the 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, the issue of paper money is the sole monopoly of the central bank of a country.
4. 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 poor households from availing of 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 an earlier loan.
5. 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.
Extra/additional MCQs
1. Barter system involves exchange of:
A. Goods for money B. Goods for goods C. Services for money D. Services for services
Answer: B. Goods for goods
2. The main difficulty of barter system is:
A. Double coincidence of wants B. Lack of common measure of value C. Both A and B D. None of the above
Answer: C. Both A and B
3. In ancient times, commodities like grain and cattle were used as:
A. Paper money B. Coins C. Medium of exchange D. Legal tender
Answer: C. Medium of exchange
4. The money made of paper is called:
A. Standard money B. Bank money C. Paper money D. Near money
Answer: C. Paper money
5. Money does not perform which of these functions?
A. Medium of exchange B. Unit of account C. Store of value D. Providing employment
Answer: D. Providing employment
6. Highly liquid assets that can be easily converted to cash are known as:
A. Standard money B. Bank money C. Near money D. Paper money
Answer: C. Near money
7. Demand deposits at banks that can be withdrawn by cheques are called:
A. Standard money B. Bank money C. Near money D. Paper money
Answer: B. Bank money
8. In India, currency notes are issued by:
A. Government of India B. Reserve Bank of India C. Commercial banks D. Co-operative banks
Answer: B. Reserve Bank of India
9. Money declared legal tender by the government is known as:
A. Standard money B. Bank money C. Near money D. Paper money
Answer: A. Standard money
10. Coins with same value as their metal content are called:
A. Token coins B. Full-bodied coins C. Standard coins D. Legal tender coins
Answer: B. Full-bodied coins
11. The primary function of money lenders is:
A. Accepting deposits B. Lending money C. Issuing currency D. Providing insurance
Answer: B. Lending money
12. Loans provided without collateral come under:
A. Formal credit B. Informal credit C. Institutional credit D. Non-institutional credit
Answer: B. Informal credit
13. Which of these is an informal financial institution?
A. Commercial banks B. Co-operative banks C. Money lenders D. Reserve Bank of India
Answer: C. Money lenders
14. The main advantage of formal sector loans is:
A. Higher interest rates B. Lack of documentation C. Lower interest rates D. No collateral required
Answer: C. Lower interest rates
15. Institutions accepting deposits and providing loans are called:
A. Commercial banks B. Co-operative banks C. Money lenders D. Both A and B
Answer: D. Both A and B
16. The primary function of Self-Help Groups is:
A. Accepting deposits B. Providing loans to members C. Issuing currency D. Both A and B
Answer: B. Providing loans to members
17. A typical Self-Help Group has how many members?
A. 5-10 B. 10-15 C. 15-20 D. 20-25
Answer: C. 15-20
18. Loans provided with collateral come under:
A. Formal credit B. Informal credit C. Institutional credit D. Non-institutional credit
Answer: A. Formal credit
19. The primary source of funds for private finance companies is:
A. Bank loans B. Government subsidies C. Deposits from members D. Foreign investments
Answer: C. Deposits from members
20. Which is a disadvantage of the barter system?
A. Double coincidence of wants B. Lack of common measure of value C. Difficulty in storing perishable goods D. All of the above
Answer: D. All of the above
21. Exchanging goods or services for a promise of future payment is called:
A. Barter B. Credit C. Lending D. Borrowing
Answer: B. Credit
22. Which of these is not a legal tender money in India?
A. Currency notes issued by RBI B. Coins issued by Government of India C. Demand deposits at banks D. Promissory notes issued by individuals
Answer: D. Promissory notes issued by individuals
23. A situation where high interest prevents loan repayment is known as:
A. Debt-trap B. Credit crunch C. Loan default D. Bankruptcy
Answer: A. Debt-trap
24. Which is not a function of the Reserve Bank of India?
A. Issuing currency notes B. Regulating commercial banks C. Providing loans to individuals D. Monitoring cash reserve ratios of banks
Answer: C. Providing loans to individuals
25. The primary purpose of commercial banks is:
A. Accepting deposits and providing loans B. Issuing currency notes C. Regulating the financial system D. Providing insurance services
Answer: A. Accepting deposits and providing loans
26. The process of creating new money by commercial banks is called:
A. Money creation B. Money supply C. Credit creation D. Monetary policy
Answer: C. Credit creation
27. Which is not a feature of a Self-Help Group?
A. Regular savings by members B. Providing loans to members C. Accepting deposits from the public D. Promoting self-employment opportunities
Answer: C. Accepting deposits from the public
28. The primary advantage of Self-Help Groups for poor borrowers is:
A. Lower interest rates B. No collateral requirement C. Easy access to formal credit D. All of the above
Answer: D. All of the above
29. Which is not a function of money?
A. Medium of exchange B. Unit of account C. Store of value D. Providing employment opportunities
Answer: D. Providing employment opportunities
30. Exchanging goods or services without using money is called:
A. Barter system B. Credit system C. Monetary system D. Financial system
Answer: A. Barter system
Extra/additional questions and answers/solutions
1. What is the Latin word from which the word ‘money’ is derived?
Answer: The word ‘money’ is derived from the Latin word ‘Moneta’.
Q. What is the name of the Roman Goddess in whose temple at Rome, money was coined?
Answer: The Roman Goddess was Juno.
Q. What does the term ‘fiat money’ refer to?
Answer: Fiat money refers to currency that acts as money under the fiat (order) from the government.
Q. What is the name given to coins with face value equal to their metallic value?
Answer: Such coins are called full-bodied coins.
Q. What is the term used for bank deposits that can be withdrawn by cheques?
Answer: Bank money or credit money refers to bank deposits that can be withdrawn by cheques.
Q. What is the minimum proportion of deposits that banks are required to keep as cash reserves?
Answer: Banks are required to keep a minimum proportion of deposits as reserves to meet the cash requirements of their depositors, which is around 15% in India.
Q. What is the main source of income for commercial banks?
Answer: The difference in interest rates charged from borrowers and paid to depositors is the main source of income for commercial banks.
Q. What is the name given to the unorganized sector of the financial market?
Answer: The unorganized sector of the financial market is called the informal financial institutions.
Q. Who are indigenous bankers?
Answer: Indigenous bankers are individuals and private firms that receive deposits and give loans, acting as mini banks largely in urban areas.
Q. What is the primary function of moneylenders?
Answer: The primary function of moneylenders is money lending, operating largely in rural areas.
Q. What is the maximum number of members generally present in a Self-Help Group (SHG)?
Answer: Usually, a SHG has 15 to 20 members belonging to one neighborhood.
Q. What is the purpose of SHGs?
Answer: SHGs help poor borrowers overcome the problem of lack of security for availing loans from banks.
Q. What are the two main difficulties of the barter system?
Answer: The two main difficulties of the barter system are double coincidence of wants and lack of a common unit of value.
Q. What is the term used for highly liquid assets that can be easily converted into cash?
Answer: Such highly liquid assets are called near money.
Q. What is the name given to the system where goods and services are exchanged directly for other goods and services?
Answer: The system where goods and services are exchanged directly for other goods and services is called the barter system.
Q. What is the term used for financial institutions whose transactions are governed by rules and regulations?
Answer: Such financial institutions are called formal financial institutions.
Q. What is the purpose of accepting demand deposits by commercial banks?
Answer: Acceptance of demand deposits is necessary for a financial institution to become a commercial bank.
Q. What is the term used for a situation where a debt is difficult or impossible to repay due to high interest payments?
Answer: Such a situation is called a debt-trap.
Q. What is the name of India’s central bank?
Answer: The Reserve Bank of India (RBI) is India’s central bank.
Q. What is the purpose of money in an economy where it is in use?
Answer: In an economy where money is in use, 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, his desired commodity, or any other commodity from the market.
Q. How does money serve as a unit of account?
Answer: In borrowing and lending transactions, there is no transfer of money right now, but the borrower promises to pay money in future. Here, money serves as a unit of account.
Q. What is the legal definition of money?
Answer: According to the legal definition, money is anything what the law accepts as a medium of exchange. In other words, anything which the government declares as money is accepted as a medium for commercial exchange and payment for a money debt.
Q. What is the functional definition of money?
Answer: According to the functional definition, money is defined on the basis of functions it performs. Anything which is generally accepted as a medium of exchange in payment of debts and as payment of goods and services is called money.
Q. What is the difference between narrow and broad definitions of money?
Answer: The narrow definition of money is based upon its medium of exchange function. Under it, only currency notes and coins are included in money. On the other hand, the broad definition of money, besides including currency notes and coins, also includes some other things like time deposits at banks and post offices.
Q. What are the three kinds of money?
Answer: The three kinds of money are: (1) Standard Money, (2) Bank Money, and (3) Near Money.
Q. What is the role of banks in the modern forms of money?
Answer: Banks accept demand deposits and provide cheque facility to their depositors. Thus, the modern forms of money – currency and demand deposits are closely linked to the working of the modern banking system.
Q. What is the meaning of a commercial bank?
Answer: A commercial bank is a financial institution which accepts deposits from the public and gives loans for purposes of consumption and investment.
Q. What are the advantages of formal sector loans?
Answer: The advantages of formal sector loans are: (i) Loans from banks and co-operatives are relatively much cheaper with interest rates 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, and (iv) Many people can borrow cheaply for a variety of different needs like growing crops, setting up small-scale industries or trading in goods.
Q. Explain the meaning and definition of money according to the functional definition.
Answer: According to the functional definition, money is defined on the basis of functions it performs. Anything which is generally accepted as a medium of exchange in payment of debts and as payment for goods and services is called money. An ideal functional definition of money should include all the important functions of money. It must also possess the characteristics of general acceptability. In this regard, Crowther’s definition of money is considered the best definition. He defines money as, “anything that is generally acceptable as a means of exchange and at the same time, acts as a measure and a store of value.”
Q. Distinguish between standard money and bank money.
Answer: Standard money is legal tender money. It is legal tender in the sense that no one can refuse to accept it. Standard money can be of two types: (i) Paper notes and (ii) Coins Paper notes and coins, taken together, are called currency. Currency is also called fiat money as it acts as money under the fiat (order) from the government.
Bank money (also called credit money) refers to bank deposits which can be withdrawn by means of bank cheques and bank drafts. Anyone who has deposited money with a bank has the right to withdraw it at any time he likes. A cheque book is generally given by the bank to the depositor for this purpose. Thus, demand deposits are the liabilities of banks. These deposits are subject to transfer by cheques or otherwise. These can be used as a medium of exchange.
Q. Explain the role played by banks in the financial system.
Answer: Banks accept demand deposits and provide cheque facility to their depositors. Thus, the modern forms of money currency and demand deposits are closely linked to the working of the modern banking system.
Banks keep a small proportion of their deposits (say 15% in India) in cash with themselves. This cash is kept as a provision to pay the depositors who might come to withdraw their money at any time on any given day. Since, all depositors will not come collectively to withdraw their money on any particular day, the bank can easily manage with this small proportion of deposits to meet the depositors’ needs. Hence, banks use the major portion of their deposits in advancing loans to the borrowers. In this way, banks act as intermediaries between the depositors and the borrowers. They offer less interest on deposits and charge higher interest on loans. This difference in interest rates becomes the main source of banks’ income.
Q. What are the advantages of formal sector loans?
Answer: Advantages of Formal Sector Loans:
- Loans from banks and co-operatives are relatively much cheaper. Interest rate remains around 8 to 12% per annum.
- Mode of repayment of loan is very easy.
- Formal credit saves the borrower from falling into a debt-trap.
- Many people can borrow cheaply for a variety of different needs. Farmers can grow crops, unemployed youth can set up small-scale industries or can trade in goods.
In short, cheap and affordable credit is provided by the formal credit institutions which proves very crucial for the country’s development.
29. How do Self-Help Groups (SHGs) help poor borrowers overcome the problem of lack of security?
Answer: Poor people organize themselves into Self-Help Groups (SHGs) and pool their savings. Usually, a SHG has 15 to 20 members belonging to one neighborhood. The members of the group meet and save regularly. They save from ₹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, which of course is much lower than what the local moneylender charges. If the SHG is regular in its savings, it becomes eligible for bank loans. Bank loan is sanctioned in the name of the SHG which is meant for creating self-employment opportunities for the members.
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. If any member of the group is not repaying the loan amount as scheduled, the case will be seriously taken up by other members in the group. It is because of this feature of an SHG that banks are willing to lend to the poor organized in the SHGs. They do not ask even for collateral from the SHGs. In this way, SHGs help poor borrowers overcome the problem of lack of security.
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