Answers of Ch-Money and Credit

                               

 Answer 1: Money is something that can act as  a medium of exchange and measure of value.

 Answer2: Money can be classified into the following types or forms: (i) Coins such as gold, silver, copper coins. (ii) Paper notes, (iii) Fiat money, (iii) Credit money or deposits with Banks, and (iv) Commodity money in the form of grains, cattle etc.   

 Answer3: When two parties agree to sell and buy each others commodities, this situation is known as double coincidence of wants. That is, what a person desires to sell is exactly what the other wishes to buy. In a barter system, where goods are directly exchanged for another type of goods or service without the use of money, double coincidence of wants is a must.   

 Answer4: It is the system in which one type of goods or service is directly exchanged for another type of goods or service without the use of money. Double coincidence of wants is an essential feature of this system. Before the evolution of money, exchange was done through this system.   

 Answer5: Since money acts as an intermediate in the exchange process, it is called a medium of exchange. 

 Answer6:

 Credit : Credit or Loan refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. Credit is a crucial element in economic life and plays an important role in the development of the country. Terms of Credit : The interest rate, collateral, documentation requirement and the mode of payment are the various factors which together comprise the “Terms of Credit”.

Collateral : Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid. Collaterals can be land, building, vehicle, stocks, cattle, bank deposits etc. Fiat Money : The ‘Fiat Money’ is meant for that money which serves as money on the basis of fiat or order of government. Cheque : A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been made. Demand Deposits : The deposits in the bank account which can be withdrawn on demand are known as ‘Demand Deposits’.       

Answer7: As we know, in a barter system where goods are directly exchanged without the use of money, double coincidence of wants is a necessary condition. By serving as a medium of exchange, money removes the need for double coincidence of wants and the difficulties associated with barter system. In this way, the use of money makes it easier to exchange things. 

 Answer8: Yes, in rural areas generally crops and food-grains are directly exchanged without the use of money. Similarly, agricultural labourers are normally paid not in cash but in kind, e.g. 5kg. wheat or rice per day.       

Answer9: Mr.Salim would write date on the space given. He would instruct the bank to pay ‘Self’ and also write ‘Twenty thousands only’ further to Rupees and fill up the amount and account number e.g. ‘20000/-‘etc. at the proper spaces as mentioned over the cheque. Then he would have to put his signature on the right hand lower side of the cheque. Now he would submit it on the counter of the bank.   

 Answer10: Since demand deposits are accepted widely as a means of payment along with currency, they are also considered as money in the modern economy.

Answer11: Bank would not be able to give money to the depositors if they all went to ask for their money all at the same time. This is because, banks keep only about 15% and would have already used the balance d portion of their deposits to extend loans.      

Answer12: Pest attack, exploitation by money lenders and lack of monsoon are the reasons that make Swapna’s situation so risky. Pesticides – Pest attack can be controlled by pesticides. Role of Moneylenders – Generally moneylenders exploit farmers. They charge very high rate of interest and keep them in debt-trap. Climate – Nearly 60% of our agricultural land area are still un-irrigated. Our farmers heavily depend on rainfall. So, climate plays a vital role in agriculture. 

  

 Answer13: Lenders ask for collateral as security against loans. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to recover the payment.  

 Answer14: Lenders ask for collateral as security against loans. If the borrowers fail to repay the loan, the lender has the right to sell the asset or collateral to recover the loan amount.    

Answer15: low, easy, less.  

Answer16: The various sources of credit in Sonpur are – 1. village moneylender 2. agricultural trader 3. landowner-employers. 4. bank.  

Answer17: Arun will have higher income from cultivation compared to Shyamal. This has following reasons: 1. Arun has 7 acres of land compared to 1.5 acres land of Shyamal. 2. Arun received bank loans at an interest rate of only 8.5% per annum. On the other hand Shyamal has received loan at an interest rate of 36% per annum which is much higher than Arun’s. 3. Arun has to repay loan anytime in the next three years while Shyamal will have to repay within 3-4 months. 4. Shyamal received loan under the condition that he will sell the crop to the trader at a lower price than the market price while there no such condition with Arun.  

  Answer18: No, everyone in Sonepur can not get credit at a cheap rate. This is because, collateral is required for taking bank loan at cheap rate. Only those people, who can fulfill collateral and documentation requirements, get credit from bank at a much rate.       

  Answer19: The various differences between formal and informal sources of credit are shown in the following table

Formal Sources of Credit 1. They cover those sources of credit which are registered by the Government and have to follow its rules and regulations e.g. Banks, Cooperatives.   2. The RBI supervises the functioning of formal sources of credit.  3. Apart from profit-making, they have also an objective of social welfare.  4. The rate of interest charged by formal sources is always much lower than that of informal sources.  5. The terms of credit are also fair and reasonable.

Informal Sources of Credit  1. They include those small and scattered units which are outside the control of the Government e.g. individual moneylenders, traders, employers, etc  2. There is no organizational supervision or adherence to rules and regulations in the credit extending activities in this sector.  3. Their only motive is to extract profit as much as possible.  4. They charge random and much higher interests in comparison to formal sectors. 5. They impose very tough and sometimes even, unreasonable terms of credit on the borrower.

 Answer20: Credit should be available at reasonable rates for all as other wise it will not be useful for the borrower. Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loans. Credit given at high interest rate can sometimes result into the amount to be repaid is greater than the income of the borrower. This could lead to increasing debt and debt-trap as we saw for Rama in Sonpur. Credit is a crucial element in economic activities. It has a major role in the development of the country as it helps people in setting up their business, in increasing their earnings and social status. Therefore, cheap and affordable credit is crucial for the country’s development.     

Answer21: Undoubtedly, the share of formal sector credit is for the richer households as compared to the poorer households. It is because; poverty affects poor households’ capacity to borrow. Formal sector credit requires proper documents and collateral as security against loans. But poor people lack in providing such things which affect their capacity to get loans from formal sector. That is why, the formal sector are sometimes, unwilling to lend to poor households and thus, their share of formal sector credit is lower than the rich households.