Money And Credit

How does the use of money make it easier to exchange things?

Answer explanation

Money is any item which is generally accepted as payment against any goods or services and repayment of debts. Money is widely accepted as a medium of exchange. Central Bank is the institution that authorizes money as a medium of exchange. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another. The difficulty with a barter system is that in order to obtain a particular good or service, one has to possess a good or service of equal value which the other party also desires. In other words, the exchange can take place only if there is a double coincidence of wants between the two parties. The chance of getting a perfect double coincidence of wants is negligible and makes the exchange difficult. Money eliminates this problem by serving as a medium of exchange that is accepted in all transactions, by all parties, irrespective of whether they desire each other’s goods and services.

Who issue the currency notes in India?

Answer explanation

Money is widely accepted as a medium of exchange. Reserve Bank of India (RBI) is the institution that authorizes money as a medium of exchange. RBI is the central bank of India. RBI is the central authority that can authorize and issue the currency note and coins which are widely accepted as the medium of exchange. They act on behalf of the central government in most of the financial perspective of the country

For which purpose is a major portion of the deposits with the banks used?

Answer explanation

Commercial banks play a very important role in the process of credit creation. Banks use a major portion of their deposits for further credit creation. The process of credit creation begins with banks’ lending money out of deposits that are accepted from the people. But banks cannot lend the entire deposits as they are required to maintain a certain proportion of primary deposits in the form of reserves with the RBI under RBI & Banking Regulation Act. That reserve which is maintained with RBI is known as cash reserve ratio. After maintaining the required reserves, the bank can lend the remaining portion of deposits.

Whose signature is found on a 10-rupee note?

Answer explanation

Reserve Bank of India (RBI) is the institution that authorizes money as a medium of exchange. RBI is the central bank of India. RBI is the central authority that can authorize and issue the currency note and coins which are widely accepted as the medium of exchange. Thus signature of the then RBI Governor is found on a 10-rupee note

Give an example of how credit pushes a person into debt-trap.

Answer explanation

The debt trap is the situation when a person becomes indebted and there is no way in which the debt can be repaid. It mainly occurs in the agricultural sector in rural areas. The farmers require cheap credit for the purchase of pesticides, fertilisers, seeds and other farming equipment. But adverse situations like crop failure will make the farmers incapable of repayment. This debt increases with every fresh instalment of loans taken and finally results in a debt trap from which the farmers are not able to recover.

How many members does a typical SHG comprise of?

Answer explanation

Self Help Group is a voluntary organization formed to enhance the microcredit for the members in it. The members of the organization save their money by fixing an amount to be deposited weekly, the amount will be such that it is affordable for everyone. That deposited money can be advanced as a loan to any of the member in the group who is actually in need of it. The loan will be advanced by the consent of all the group members. There will be transparency in the working of the organization because all the group members will be from the same neighbourhood. Normally an SHG will have 15-20 members.

Explain any three drawbacks of the barter system.

Answer explanation

The barter system is the traditional form of transferring the goods and services for other goods and services. It is an old method of exchange. This system has been used for centuries and long before money was invented. People exchanged services and goods for other services and goods in return. Some of the major drawbacks of the system are: • Double coincidence of wants: One of the most important drawbacks of the barter system was a double coincidence of wants in which the buyer and seller should agree to buy and sell each other's commodity in exchange. It is very difficult to find the buyer who is need of commodity which the seller wants to sell. • Lack of proper valuation of goods: In a barter system there will not be an equal valuation of the goods. There will be no existence of costly good or cheaper goods. All the goods will be equal. • Store of value: Barter system lacks the function of store of value because the sold commodities cannot be saved for future use whereas money can be easily saved as a deposit. The goods do not possess the quality to use for future requirements.

What are the modern forms of money? Why the rupee is widely accepted as a medium of exchange?

Answer explanation

Anything that is acceptable as a medium of exchange and even the means of payment for the settlement of debts can be considered as money. The money as we see today has been the result of a long evolution process. In today's world, modern money consists of the following: • Currency notes and coins: This is the modern form of money that is being used across the world. The precious metals and coins that were used in the early periods were inconvenient to be carried in large quantities. In place of this, paper currency was introduced that gave the convenience of the transaction to the users. They could carry large amounts in the form of currency notes. In the modern currency system, the currency notes and coins are issued by the central bank that is the apex monetary authority of the country. No one has the authority to reject the money that is being circulated by the central bank. Thus this became the most convenient method of conducting transactions and exchanges. • Deposits with banks: Commercial bank accepts various types of deposits from the public. These deposits are payable after a certain time period. There are different types of deposits that are accepted by the commercial banks like demand deposits, savings deposit, current account deposit, permanent deposit and recurring deposit. Out of this, demand deposit is considered to be a form of money. Demand deposits can be withdrawn by the user as and when the amount is required without any restrictions using cheques. Thus it is also considered as a modern form of money. • Plastic money and e-money: This developed with the development of internet facilities. Plastic money consists of debit cards, credit cards and other facilities. The users can carry them instead of carrying currency. A debit card allows the user to withdraw money from the account while credit card allows the user to overdraw beyond the account holder's balances. The expansion of the internet has also paved the way for the development of e-wallets like PayTm, Google Pay and other services through which transactions can be carried out. In India, the rupee is widely accepted as a medium of exchange because of the authentication of the Reserve Bank of India (RBI). RBI plays an essential role in printing currencies. There is no other authority that has the power to issue and circulate the currency. It is the law that legalizes the use of rupee as a medium of exchange anywhere in India. No person can refuse the Rupee for the transaction. If Rupee is refused by anyone, they can be sued by law. Therefore it is the law that makes the rupee as a widely accepted as a medium of exchange in the country.

Why are demand deposits considered as money?

Answer explanation

The commercial bank accepts various types of deposits from the public. These deposits are payable after a certain time period. There are different types of deposits that are accepted by the commercial banks like demand deposits, savings deposit, current account deposit, permanent deposit and recurring deposit. Out of this, demand deposit is considered to be a form of money. Demand deposits can be withdrawn by the user as and when the amount is required without any restrictions using cheques. Thus it is also considered as a modern form of money.

Why do lenders ask for collateral while lending? Explain.

Answer explanation

Collateral is an important requirement for the loan. Collateral is an asset that the borrower owns. The collateral can be anything that has monetary value in it. The bank demands the collateral for the guarantee against their repayment for the credit. The lender uses that collateral as a guarantee for that which borrower will repay the amount in future. If the borrower fails to repay the loan, the lender has the right to sell the collateral to obtain the compensation. Collateral can be land, building, gold, vehicle or anything of value owned by the borrower. The requirement of collateral for taking loans from institutional sources makes it impossible for the poor to take loans from banks and other institutions. Thus they have to rely on other sources.