Money and Credit Class 10: Notes, Concepts and Board Answers

What Money and Credit is about

Weightage: Economics carries 20 of the 80 theory marks; this chapter shares them with Development, Sectors of the Indian Economy and Globalisation and the Indian Economy.Source: CBSE Social Science syllabus 2026-27, Economics

In real board papers: asked in 21 of the 21 board papers we hold (2023 to 2026), on average 5.2 marks per paper. See the questions

Key concepts

Money as a Medium of Exchange

NCERT section Money as a Medium of Exchange

In a barter system, goods are swapped directly for other goods. This works only when there is a double coincidence of wants. That means what one person wants to sell is exactly what the other wants to buy, and the other way round. Take the NCERT shoe manufacturer who wants wheat. Without money, he must find a farmer who has wheat to sell and who also wants shoes. That search is slow and often fails.

Money solves this by acting as the step in the middle. The shoe maker sells shoes to any buyer for money. Then he uses that money to buy wheat, or anything else, from anyone. Because money stands between the two halves of the exchange, it is called a medium of exchange. Everyone prefers to be paid in money, because money can be exchanged for any good or service.

Money has taken many forms over time. Early Indians used grains and cattle as money. Later came metallic coins of gold, silver and copper, a phase that lasted well into the last century.

Worked example

Suppose a potter wants rice, but the rice farmer nearby needs a bicycle repair, not pots. Using this case, explain how money removes the need for a double coincidence of wants. (3 marks)

Try it first, then show the solutionSolution

1. Barter needs a double coincidence of wants: each person must want exactly what the other is offering, which the potter and the farmer do not. (1 mark)
2. Money acts as an intermediate step: the potter sells pots to anyone who wants them for money, so he only needs a buyer, not a farmer who wants pots. (1 mark)
3. He then pays the farmer in money for rice, and the farmer can use that money for the bicycle repair; money is a medium of exchange accepted by all. (1 mark)

Answer: Under barter, the potter must find a rice farmer who also wants pots, which is rare. Money removes this need by acting as an intermediate. The potter sells his pots to any buyer for money and pays the farmer in money for rice. The farmer, in turn, can spend that money on the bicycle repair.

Modern Forms of Money: Currency

NCERT section Currency

Modern money includes currency, which means paper notes and coins. This raises a puzzle. Older forms of money, such as gold coins, grain and cattle, had value of their own. A paper note is not made of precious metal, and it is not something of everyday use. It has no use of its own. So why does everyone accept it?

The answer is that currency is authorised by the government. In India, notes are issued by the Reserve Bank of India, acting for the central government. Indian law allows no other person or organisation to issue currency. The law also makes the rupee a means of payment that cannot be refused in settling transactions in India. Since no individual can legally refuse rupees, everyone trusts and accepts them. That is why the rupee works as a medium of exchange.

An assertion-reason item may put a wrong authority in the reason, such as the World Bank or the state governments. Remember the chain: the RBI issues notes for the central government, and the law makes the rupee acceptable.

Worked example

Read the statements and choose the correct option. (1 mark)
Assertion (A): Modern currency is accepted as a medium of exchange even though it is not made of precious metal.
Reason (R): Modern currency is authorised by the government of the country.
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true but R is not the correct explanation of A.
(c) A is true but R is false.
(d) A is false but R is true.

Try it first, then show the solutionSolution

1. Check A: modern notes and coins are not made of gold, silver or copper, yet people accept them. A is true. (½ mark)
2. Check R: currency is authorised by the government, and this authority is exactly why it is accepted. R is true and it explains A. (½ mark)

Answer: (a) Both A and R are true and R is the correct explanation of A.

Deposits with Banks and Cheques

NCERT section Deposits with Banks

People need only some cash for daily needs. A salaried worker has extra cash at the start of the month. So people open bank accounts and deposit the extra money. The bank keeps the money safe and also pays interest on it. The money can be withdrawn whenever the depositor wants. Because these deposits can be withdrawn on demand, they are called demand deposits.

Demand deposits have one more facility that makes them behave like money: cheques. A cheque is a paper that instructs the bank to pay a specific amount from the payer's account to the person named on it. When M. Salim pays his leather supplier by cheque, the supplier deposits it in his own bank. In a couple of days, the amount moves from Salim's account to the supplier's account. The payer's balance falls and the receiver's balance rises. No cash changes hands.

Since demand deposits are widely accepted as a means of payment, along with currency, they count as money in the modern economy. Without banks there would be no demand deposits and no cheque payments. So modern money is closely tied to the banking system.

Worked example

Suppose a shopkeeper pays ₹ 10,000 to a supplier by cheque. Explain how this payment is settled without cash, and why demand deposits are treated as money. (3 marks)

Try it first, then show the solutionSolution

1. A cheque is an instruction from the payer to his bank to pay a specific amount from his account to the person named on it. (1 mark)
2. The supplier deposits the cheque in his own bank account. The amount moves from the shopkeeper's account to the supplier's account: the shopkeeper's balance falls and the supplier's rises, and no cash is used. (1 mark)
3. Demand deposits can be withdrawn on demand and are widely accepted as a means of payment along with currency, so they are money. (1 mark)

Answer: A cheque instructs the shopkeeper's bank to pay ₹ 10,000 to the supplier. The supplier deposits it in his own account. The amount is transferred from the shopkeeper's account, whose balance falls, to the supplier's account, whose balance rises, with no cash used. Demand deposits can be withdrawn on demand and are widely accepted for payment, so they count as money.

Loan Activities of Banks

NCERT section Loan Activities of Banks

What does a bank do with all the deposits it receives? It keeps only a small part as cash. Banks in India hold about 5 per cent of their deposits as cash. This is enough because, on any given day, only a few of the many depositors come to withdraw money.

The major portion of deposits is used to give loans. There is a huge demand for loans for many economic activities. In this way, the bank mediates between two groups. On one side are depositors, who have surplus funds. On the other side are borrowers, who need funds.

Banks charge a higher interest rate on loans than they pay on deposits. The difference between the interest charged from borrowers and the interest paid to depositors is the bank's main source of income.

The RBI watches over this system. It checks that banks actually keep the minimum cash balance. This is why a bank can safely lend most of its deposits.

Worked example

Banks in India keep only about 5 per cent of their deposits as cash. A student says, 'This is careless. Banks should keep all deposits as cash.' Do you agree? Justify your answer. (3 marks)

Try it first, then show the solutionSolution

1. Disagree: on any particular day only some depositors withdraw money, so a small cash balance is enough. The RBI also monitors that banks keep this minimum balance. (1 mark)
2. The major part of deposits is lent out to meet the huge demand for loans. In this way banks mediate between depositors with surplus funds and borrowers who need funds. (1 mark)
3. Banks earn their main income from the gap between loan interest and deposit interest. If all deposits sat as cash, there would be no loans and no income. (1 mark)

Answer: I disagree. Only some depositors withdraw on any day, so about 5 per cent cash is enough, and the RBI checks that banks keep it. The rest is lent to borrowers who need funds, linking them with depositors who have surplus money. Banks earn from the gap between loan and deposit interest. Keeping everything as cash would stop lending and this income.

Credit: Two Different Credit Situations

NCERT section Two Different Credit Situations

Credit (a loan) is an agreement in which the lender gives the borrower money, goods or services in return for a promise of future payment. Credit is neither good nor bad in itself. The NCERT gives two cases to show this.

Salim gets an order for 3,000 pairs of shoes in the festival season. He needs working capital to hire workers and buy raw materials. He takes leather on credit from the supplier and an advance in cash from the trader. He delivers on time, makes a profit and repays. Here credit helps him earn more.

Swapna, a small farmer, borrows from a moneylender to grow groundnut on three acres. Pests destroy the crop. She cannot repay, and the debt grows. Next year the crop is normal, but her earnings cannot cover the old loan. She has to sell part of her land. This is a debt trap: credit pushes the borrower into a situation from which recovery is very painful.

The lesson: whether credit helps depends on the risks in the situation and whether there is support in case of loss. Farming is risky because repayment depends fully on crop income, which comes three to four months after inputs are bought.

Worked example

'Credit can make a borrower better off or worse off.' Justify this statement by comparing the cases of Salim and Swapna. (5 marks)

Try it first, then show the solutionSolution

1. Salim took credit, leather on credit and a cash advance, to meet working capital needs for a large shoe order. (1 mark)
2. He completed production on time, earned a profit and repaid the loans, so credit made him better off. (1 mark)
3. Swapna borrowed from a moneylender for cultivation, but pests destroyed her crop and she could not repay. (1 mark)
4. Her debt grew, the next year's earnings could not cover it, and she sold part of her land. She fell into a debt trap. (1 mark)
5. Conclusion: the usefulness of credit depends on the risk involved and on whether there is support in case of loss. (1 mark)

Answer: Salim borrowed leather on credit and took a cash advance to meet working capital needs for a big order. He delivered on time, made a profit and repaid, so credit raised his earnings. Swapna borrowed from a moneylender to grow groundnut. Pests destroyed her crop and she could not repay. The debt grew, and even a normal harvest next year could not clear it, so she sold part of her land. This is a debt trap. So credit helps only when risks are manageable or there is support in case of loss.

Terms of Credit

NCERT section Terms of Credit

Every loan comes with conditions. Together they are called the terms of credit. There are four:

• Interest rate: the extra amount the borrower pays along with the principal.
• Collateral: an asset the borrower owns, such as land, a building, a vehicle, livestock or bank deposits, kept as a guarantee until the loan is repaid. If the borrower fails to repay, the lender has the right to sell it.
• Documentation: papers the lender asks for, such as proof of employment and salary.
• Mode of repayment: how and when the loan is paid back, for example monthly instalments.

Why do lenders want collateral? It protects them if the borrower does not repay. This is also why the poor, who often have no assets, find it hard to borrow from banks.

Terms vary a lot depending on the nature of the lender and the borrower. A borrower looks for easy terms: a low interest rate, easy repayment conditions, and less collateral and documentation.

Worked example

Megha took a loan of ₹ 5 lakhs from a bank to buy a house. The annual interest rate is 12 per cent, repayable in 10 years in monthly instalments. She submitted her employment and salary records, and the bank kept the papers of the new house until full repayment. What are 'terms of credit'? Identify each term in Megha's loan. (3 marks)

Try it first, then show the solutionSolution

1. Definition: terms of credit are the interest rate, collateral, documentation requirement and mode of repayment of a loan taken together. (1 mark)
2. Interest rate: 12 per cent per annum. Mode of repayment: monthly instalments over 10 years. (½ + ½ mark)
3. Documentation: employment records and salary. Collateral: papers of the new house. (½ + ½ mark)

Answer: Terms of credit are the interest rate, collateral, documentation and mode of repayment taken together. In Megha's loan the interest rate is 12 per cent a year. Repayment is in monthly instalments over 10 years. The documentation was her employment and salary records. The collateral is the papers of the new house, returned only after full repayment.

Formal and Informal Sources of Credit

NCERT section Formal Sector Credit in India

Loans can be grouped into two kinds. Formal sector loans come from banks and cooperatives. Informal sector loans come from moneylenders, traders, employers, relatives and friends.

The village of Sonpur shows the difference. Shyamal, a small farmer, once paid a moneylender 5 per cent per month (60 per cent per annum). Now he borrows from a trader at 3 per cent per month, but he must also sell his crop to the trader, who buys it cheap after harvest. Rama, a landless labourer, borrows from her landowner employer at 5 per cent per month and repays by working for him. Arun, with seven acres, gets a bank loan at 8.5 per cent per annum, repayable anytime in three years. Krishak Cooperative, with 2300 farmer members, uses members' deposits as collateral to get a bank loan, then lends to members.

The key difference is supervision. The RBI supervises formal lenders. It checks their cash balance, sees that they lend to small cultivators and small industries, and collects information on their lending. No one supervises informal lenders. They can charge any interest rate and use unfair means to recover money.

Worked example

Differentiate between formal and informal sources of credit. (5 marks)

Try it first, then show the solutionSolution

1. Sources: formal means banks and cooperatives; informal means moneylenders, traders, employers, relatives and friends. (1 mark)
2. Supervision: the RBI supervises formal lenders; no organisation supervises informal lenders. (1 mark)
3. Interest: formal lenders charge lower interest; most informal lenders charge much higher interest. (1 mark)
4. Collateral and documents: formal loans need proper documents and collateral; informal lenders often lend without collateral because they know the borrower. (1 mark)
5. Treatment and effect: informal lenders may use unfair means, keep no records and harass borrowers, which can lead to a debt trap; formal credit is cheaper and helps incomes rise. (1 mark)

Answer: - Formal credit comes from banks and cooperatives; informal credit comes from moneylenders, traders, employers, relatives and friends.
- The RBI supervises formal lenders, but no organisation supervises informal ones.
- Formal loans carry lower interest; most informal loans carry much higher interest.
- Formal lenders ask for collateral and documents; informal lenders often lend without collateral as they know borrowers personally.
- Informal lenders may use unfair means, keep no records and harass borrowers, risking a debt trap. Cheaper formal credit leaves borrowers more income.

Who Gets Formal Credit, and Why Cheap Credit Matters

NCERT section Formal Sector Credit in India

The data in the chapter shows an unfair pattern. Among urban households, 54 per cent of the loans of poor households come from informal sources. For rich households, only 17 per cent are informal and 83 per cent are formal. A similar pattern is found in rural areas. So the rich get cheap formal credit, while the poor pay heavily for borrowing.

Why does this matter? A higher cost of borrowing means a larger part of the borrower's earnings goes to repaying the loan, so less income is left, as with Shyamal. Sometimes the amount to be repaid is more than the borrower's income, and debt keeps rising, as with Rama. High costs also stop people from borrowing to start a new enterprise.

The chapter draws two conclusions. First, the formal sector still meets only about half of the credit needs of rural people, so banks and cooperatives must lend more, especially in rural areas. Second, formal credit must be shared more equally so that the poor also get cheaper loans. Cheap and affordable credit is crucial for the country's development.

Worked example

Study the data: of all loans taken by poor urban households, 54 per cent are from informal sources. For rich urban households, only 17 per cent are informal and 83 per cent are formal.
(a) What does this data suggest? (1 mark)
(b) Give two reasons why poor households depend more on informal credit. (2 marks)

Try it first, then show the solutionSolution

1. (a) Rich households get most of the cheap formal credit, while poor households depend more on costly informal credit. (1 mark)
2. (b) Reason 1: bank loans need proper documents and collateral, which the poor often lack. (1 mark)
3. (b) Reason 2: moneylenders know borrowers personally and often lend without collateral, even before earlier loans are repaid. (1 mark)

Answer: (a) Formal credit is unequally distributed. The rich get cheaper formal loans, while the poor depend on expensive informal loans.
(b) Banks ask for documents and collateral, which poor households often cannot give. Informal lenders such as moneylenders know the borrowers personally and lend without collateral, even when earlier loans are unpaid.

Self-Help Groups for the Poor

NCERT section Self-Help Groups for the Poor

Why can't the poor borrow from banks? Banks are not present everywhere in rural India. Even where they exist, bank loans need documents and collateral, and lack of collateral is a major barrier. Moneylenders lend easily but charge very high interest, keep no records and harass borrowers.

Self-Help Groups (SHGs) offer a newer way. The rural poor, especially women, form small groups of 15-20 members, usually from one neighbourhood. They meet and save regularly, from ₹ 25 to ₹ 100 or more per member, depending on their ability to save. Members take small loans from the group at interest that is still lower than the moneylender's. After a year or two of regular saving, the group becomes eligible for a bank loan. The bank gives this loan to the group as a whole, and its purpose is to help members earn a living through work of their own.

The group decides the purpose, amount, interest and repayment schedule of loans. The group is also responsible for repayment, and members follow up seriously on any default. This shared responsibility is why banks lend to SHGs without collateral. SHGs also make women financially self-reliant and give them a platform to discuss social issues such as health, nutrition and domestic violence.

Worked example

Explain the functioning of Self-Help Groups. How do they help rural poor women? (5 marks)

Try it first, then show the solutionSolution

1. Organisation: 15-20 members, usually from one neighbourhood, meet and save regularly, from ₹ 25 to ₹ 100 or more each. (1 mark)
2. Internal lending: members take small loans from the pooled savings at interest lower than the moneylender's. (1 mark)
3. Bank linkage: after a year or two of regular saving, the group gets a bank loan in its own name for self-employment. (1 mark)
4. Decisions and responsibility: the group decides loan purpose, amount, interest and repayment, and is responsible for repayment. This is why banks lend without collateral. (1 mark)
5. Benefits: timely loans at reasonable interest, financial self-reliance for women, and a platform for social issues such as health, nutrition and domestic violence. (1 mark)

Answer: An SHG has 15-20 members, usually from one neighbourhood, who meet and save regularly, ₹ 25 to ₹ 100 or more each. Members take small loans from the pooled savings at interest below the moneylender's. After a year or two of regular saving, the group gets a bank loan in its own name to create self-employment. Members decide loan purpose, amount, interest and repayment. The group is responsible for repayment, so banks lend without collateral. SHGs give women timely, reasonable loans and financial self-reliance. Their meetings let women discuss health, nutrition and domestic violence.

Money and Credit in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Money as a Medium of ExchangeComing soon
• Modern Forms of MoneyComing soon
• Loan Activities of BanksComing soon
• Credit: Situations and Terms of Credit
• Formal and Informal Sources of Credit
• Self-Help Groups for the Poor

Money and Credit: key facts

Double coincidence of wants

What one person wants to sell is exactly what the other wants to buy; it is essential in barter.

Use it to explain why barter fails and why money is needed.

Medium of exchange

Money acts as the intermediate in exchange, so it is called a medium of exchange.

Key phrase for MCQs and the 3-mark 'how money helps' question.

History of money in India

Grains and cattle, then gold, silver and copper coins, then paper notes and coins.

For questions on how money changed from ancient times to today.

Who issues currency

The RBI issues currency notes on behalf of the central government.

Common assertion-reason trap: not the World Bank, not the state governments.

Why the rupee is accepted

The law makes the rupee a payment that cannot be refused in India.

Pair it with 'modern currency has no use of its own' to explain trust in notes.

Demand deposits

Bank deposits that can be withdrawn on demand; they count as money along with currency.

Use with cheques to explain why deposits are money.

Cheque

A paper instructing the bank to pay a specific amount from the payer's account to the named person.

Remember: the payer's balance falls and the receiver's rises.

Bank cash reserve

Banks in India keep about 5 per cent of deposits as cash; the rest is used for loans.

For questions on how banks work and what the RBI monitors.

Bank's main income

Interest on loans minus interest on deposits.

Last point in any 'how banks mediate' answer.

Credit

An agreement in which the lender gives money, goods or services for a promise of future payment.

Start long answers on credit with this definition.

Debt trap

Credit pushes the borrower into a situation from which recovery is very painful (Swapna).

Cause: high risk, such as crop failure, and no support in case of loss.

Collateral

What	an asset the borrower owns
Examples	land, building, vehicle, livestock, bank deposits
Role	guarantee until repayment

The lender may sell it if the loan is not repaid; lack of it keeps the poor away from banks.

Terms of credit

Interest rate, collateral, documentation requirement and mode of repayment.

All four are needed for full marks.

Formal vs informal lenders

Formal: banks and cooperatives. Informal: moneylenders, traders, employers, relatives and friends.

Classification MCQs; employers and traders are informal.

RBI supervision

The RBI checks banks' cash balance, sees that they lend to small borrowers, and collects lending reports.

For 'how and why does the RBI supervise banks' questions.

SHG basics

Members	15-20
Savings	₹ 25 to ₹ 100 or more
Bank loan	in the group's name after a year or two

Core facts for any 3-mark or 5-mark SHG answer.

How the board asks Money and Credit

The question patterns to expect, and the method that works for each.

Tricks to remember Money and Credit

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Barter needs a double match

  Barter = 'I want yours AND you want mine'. Money = 'I just need a buyer'.

  Use it when: Any 1- or 3-mark question on double coincidence of wants.

• Money ladder

  Grain and cattle → gold, silver, copper coins → paper notes and coins → bank deposits (cheques).

  Use it when: Tracing how forms of money changed in India.

• Terms of credit: I-C-D-R

  Interest, Collateral, Documents, Repayment mode. Easy terms = low I, less C, less D, easy R.

  Use it when: Defining terms of credit and comparing two loans.

• Formal = B-C, informal = M-T-E-R

  Formal: Banks and Cooperatives. Informal: Moneylenders, Traders, Employers, Relatives and friends.

  Use it when: MCQs that ask which source is not formal.

• 54 and 17

  Poor urban households: 54 per cent of loans informal. Rich: only 17 per cent informal (83 per cent formal).

  Use it when: Data questions on who gets formal credit.

• SHG numbers: 15-20, 25-100, 1-2

  15-20 members, save ₹ 25 to ₹ 100 or more, bank loan after 1-2 years of regular saving.

  Use it when: Writing the working of an SHG with exact facts.

Money and Credit: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In the board paper this is a 3-mark question split into 1 + 1 + 1 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Money and Credit

The slips examiners see most often, and what to write instead.

• ✗Mistake: Saying the central government or banks print and issue notes

  Students know the government authorises currency and mix up who actually issues it.

  Wrong working

  Currency notes in India are issued by commercial banks.

  Right working

  In India only the RBI may issue currency notes, and it does so for the central government; no one else may legally issue them.

  ✓Do this: Memorise the full chain: RBI issues, for the central government, and the law makes the rupee acceptable.

  Usually costs: 1 mark in an MCQ or assertion-reason item.

• ✗Mistake: Calling a cheque 'money'

  Students see cheques used for payment and stop there.

  Wrong working

  A cheque is money because it can be used to pay.

  Right working

  A cheque is only an instruction to the bank. The demand deposits behind it are money, because they are withdrawable on demand and widely accepted for payment.

  ✓Do this: Say 'demand deposits are money; the cheque is the way to use them'.

  Usually costs: 1 mark in a 3-mark answer on modern forms of money.

• ✗Mistake: Putting employers or traders in the formal sector

  They lend regularly, so students assume they are formal lenders.

  Wrong working

  Formal sources: banks, cooperatives and traders.

  Right working

  Formal sources are banks and cooperatives, supervised by the RBI. Traders, employers, moneylenders, relatives and friends are informal.

  ✓Do this: Ask 'Does the RBI supervise this lender?' If not, it is informal.

  Usually costs: 1 mark per wrong item in MCQs or differences.

• ✗Mistake: Defining collateral as interest or a fee

  Students think of collateral as something paid to the lender.

  Wrong working

  Collateral is the extra money paid to the bank on a loan.

  Right working

  Collateral is an asset the borrower owns, such as land, a building, a vehicle, livestock or bank deposits, kept as a guarantee until the loan is repaid; the lender may sell it if the loan is not repaid.

  ✓Do this: Collateral is a thing you own and pledge, not money you pay.

  Usually costs: 1 mark in a definition or terms-of-credit question.

• ✗Mistake: Writing that credit is always good or always bad

  Students remember only one of the two NCERT cases.

  Wrong working

  Credit always helps people increase their income.

  Right working

  Credit helped Salim earn more but pushed Swapna into a debt trap. Whether it helps depends on the risk and on support in case of loss.

  ✓Do this: Always give both cases and end with the risk-and-support line.

  Usually costs: 2 marks in a 5-mark answer on the role of credit.

• ✗Mistake: Saying SHG loans need collateral or are given to one member

  Students apply ordinary bank rules to SHGs.

  Wrong working

  Each SHG member gets a bank loan in her own name after giving collateral.

  Right working

  The bank loan is sanctioned in the group's name; the group is responsible for repayment, so the bank lends without collateral.

  ✓Do this: Remember: group name, group decision, group responsibility.

  Usually costs: 1 to 2 marks in a 3- or 5-mark SHG answer.

NCERT exercise guide: Money and Credit

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Money and Credit: previous year questions

• Asked in 21 of the 21 board papers we hold (2023 to 2026), on average 5.2 marks per paper; 59 questions in all, counting OR alternatives. In 4 of 4 sample papers.

Counted from the real papers on our previous year papers page, not estimated. Average marks are over every board paper we hold, with an OR pair counted once. Chapter tags are ours.

Solved board questions from Money and Credit

Real questions from recent papers. Try each one first, then open our step-by-step solution with marks per step.

Every Money and Credit question, by year

Practice questions on Money and Credit

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   In a barter system, 'double coincidence of wants' means that:
   (a) both people must have money to exchange
   (b) what one person wishes to sell is exactly what the other wishes to buy
   (c) the government fixes the value of goods
   (d) goods are exchanged through banks

   Hint

   Think of the shoe maker who needs a farmer who wants shoes and also sells wheat.

   Answer

   (b) What one person wishes to sell is exactly what the other wishes to buy. Both parties must want each other's goods for barter to happen.

2. Q2 · 1 mark · Assertion-reasonBoard level

   Assertion (A): Swapna was worse off after taking credit than before.
   Reason (R): Her crop failed, so she could not repay, and she had to sell part of her land to clear the debt.
   (a) Both A and R are true and R is the correct explanation of A.
   (b) Both A and R are true but R is not the correct explanation of A.
   (c) A is true but R is false.
   (d) A is false but R is true.

   Hint

   Ask whether the crop failure is the cause of her loss.

   Answer

   (a) Both are true, and R explains A. The crop failure made repayment impossible, the debt grew, and selling land left her in a debt trap.

3. Q3 · 3 marks · Short answerBoard level

   What are demand deposits? Why are they called so, and why are they counted as money? (3 marks)

   Hint

   Link the name to the right to withdraw, then think of cheques.

   Answer

   Demand deposits are the extra cash people keep in bank accounts, on which the bank pays interest. (1)
   They are so called because the money can be withdrawn whenever the depositor demands it. (1)
   Cheques against them let people settle payments directly without cash, and they are widely accepted as a means of payment along with currency, so they count as money. (1)

4. Q4 · 3 marks · Short answerHarder board level

   Why do lenders ask for collateral before giving a loan? Explain with an example. (3 marks)

   Hint

   Think of what the lender can do if the loan is not repaid.

   Answer

   Collateral is an asset the borrower owns, such as land, a building, a vehicle, livestock or bank deposits, given as a guarantee. If the borrower fails to repay, the lender can sell it to recover the money, so the lender's risk falls. For example, Megha's bank kept the papers of her new house until she repaid the full loan with interest.

5. Q5 · 3 marks · Short answerHarder board level

   Explain how the credit Shyamal gets from the agricultural trader is unfavourable to him. (3 marks)

   Hint

   Look beyond the interest rate to the extra condition.

   Answer

   The trader charges 3 per cent per month, which is high. Shyamal must also promise to sell his crop to the trader. Crop prices are low after harvest, so the trader buys cheap, sells later at a higher price and profits, while Shyamal loses both through interest and through low prices.

6. Q6 · 5 marks · Long answerHarder board level

   Why do poor households in India still depend largely on informal sources of credit? Explain. (5 marks)

   Hint

   Think of the bank's conditions, the bank's presence, and the moneylender's advantages.

   Answer

   • Banks are not present everywhere in rural India.
   • Bank loans need proper documents, which the poor often lack.
   • Absence of collateral is a major reason the poor cannot get bank loans.
   • Moneylenders know borrowers personally and lend without collateral.
   • Borrowers can approach moneylenders again even before repaying earlier loans, though at high interest, with no records and with harassment.

7. Q7 · 3 marks · Short answerHarder board level

   What is the main demand for credit in rural areas? Why is repaying such loans risky for farmers? (3 marks)

   Hint

   Think of the time gap between buying inputs and selling the crop.

   Answer

   The main demand is for crop production, which needs spending on seeds, fertilisers, pesticides, water, electricity and equipment repair. There are three to four months between buying inputs and selling the crop, and repayment depends entirely on farm income. If the crop fails, as Swapna's did, repayment becomes impossible and the farmer may fall into a debt trap.

8. Q8 · 3 marks · Short answerHarder board level

   Explain how a cooperative such as Krishak Cooperative raises funds and provides cheap credit to its members. (3 marks)

   Hint

   Follow the money: members, then bank, then members again.

   Answer

   Members pool their resources, and the cooperative accepts deposits from them. Using these deposits as collateral, it obtains a large loan from a bank and lends the funds to members for implements, cultivation, trade, fishery and housing. When loans are repaid, another round of lending begins.

9. Q9 · 3 marks · Short answerHOTS / competency

   Study the data on sources of credit in rural India, 2019: commercial banks 51 per cent, moneylenders 23 per cent, cooperative banks and society 10 per cent, relatives and friends 7 per cent, other formal agencies 5 per cent, other informal agencies 3 per cent, landlords 1 per cent.
   (a) What share of rural credit comes from all formal sources together? (1)
   (b) Which is the largest informal source? (1)
   (c) Why is this source's large share a cause for concern? (1)

   Hint

   Formal sources are banks, cooperatives and other formal agencies. For part (c), think of interest rates, records and supervision.

   Answer

   (a) 51 + 10 + 5 = 66 per cent, about two-thirds.
   (b) Moneylenders, at 23 per cent.
   (c) Moneylenders charge very high interest, keep no records and are supervised by no one, so borrowers keep less of their income and can fall into a debt trap.

10. Q10 · 3 marks · Short answerHOTS / competency

    A student wrote: 'A cheque is itself money. Both the RBI and commercial banks can issue currency notes. Banks keep all their deposits as cash.' Find and correct the three errors. (3 marks)

    Hint

    Check each claim against what the chapter says about cheques, the RBI and banks' cash.

    Answer

    First, a cheque is only a paper instructing the bank to pay. The demand deposits behind it are money. Second, only the RBI issues currency notes, on behalf of the central government, and no one else may by law. Third, banks keep only a small part of deposits as cash (about 5 per cent in India) and use the major portion to give loans.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.What is a double coincidence of wants?Show answer

   A situation in which what one person wants to sell is exactly what the other wants to buy, and the other way round; barter needs it.

2. 2.Why is modern currency accepted though it has no use of its own?Show answer

   Because it is authorised by the government; Indian law makes the rupee a payment that cannot be refused.

3. 3.Why are demand deposits so called?Show answer

   Because the money in them can be withdrawn whenever the depositor demands it.

4. 4.About what share of deposits do banks in India hold as cash?Show answer

   About 5 per cent.

5. 5.What is a bank's main source of income?Show answer

   The difference between the interest charged on loans and the interest paid on deposits.

6. 6.What four things make up the terms of credit?Show answer

   Interest rate, collateral, documentation requirement and mode of repayment.

7. 7.What share of rural credit came from moneylenders in 2019?Show answer

   23 per cent (commercial banks gave 51 per cent).

8. 8.Who founded the Grameen Bank of Bangladesh?Show answer

   Professor Muhammad Yunus, who received the Nobel Peace Prize in 2006.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you explain double coincidence of wants with your own example?
• ☐Can you say who issues currency in India and why the rupee cannot be refused?
• ☐Can you explain why demand deposits are money and how a cheque payment is settled?
• ☐Can you explain how banks mediate between depositors and borrowers and earn their income?
• ☐Can you compare Salim's and Swapna's credit and define a debt trap?
• ☐Can you list the four terms of credit and identify them in Megha's loan?
• ☐Can you give five differences between formal and informal credit?
• ☐Can you state the 54 and 17 per cent figures and say what they show?
• ☐Can you explain how an SHG works and why banks lend to it without collateral?

Money and Credit: frequently asked questions