Money and Credit Class 10 Important Questions and Answers - FREE PDF
FAQs on CBSE Class 10 Economics Important Questions - Chapter 3 Money and Credit
1. What is meant by the 'double coincidence of wants' and why does it make the barter system inefficient?
The double coincidence of wants is a situation required in a barter system where two parties each hold an item the other wants, so they can exchange these items directly. For instance, a farmer who has wheat must find a shoemaker who not only wants to buy wheat but also has shoes to sell in exchange. This system is inefficient because finding such a mutual match is difficult and time-consuming, which severely limits trade and economic activity.
2. For the CBSE Class 10 Board Exam 2025-26, what are the modern forms of money? Explain why money is accepted as a medium of exchange.
The two modern forms of money are currency (paper notes and coins) and demand deposits in banks. Money is accepted as a medium of exchange primarily because it is authorised by the country's government. In India, the Reserve Bank of India (RBI) issues currency notes. It acts as a common, universally accepted measure of value, eliminating the need for a double coincidence of wants and simplifying transactions.
3. Explain why demand deposits are considered a form of money.
Demand deposits are considered a form of money because they can be used to make payments and settle transactions, just like cash. Depositors can withdraw their money on demand or transfer it using a cheque or digital methods (like NEFT, UPI). Since these deposits are accepted as a means of payment, they perform the essential function of money as a medium of exchange.
4. How do banks act as an intermediary between those who have surplus funds and those who are in need of funds? Explain with an example.
Banks play the role of a financial intermediary by connecting two groups of people: depositors and borrowers. Here is how the mechanism works:
- Accepting Deposits: People with surplus money, called depositors, open accounts in banks and deposit their extra cash. Banks pay a certain amount of interest on these deposits.
- Providing Loans: Banks use a major portion of these deposits to provide loans to people who need money for various purposes, such as starting a business or buying a house. These are the borrowers.
- Earning through Interest Spread: Banks charge a higher rate of interest on loans than what they offer on deposits. The difference between these two rates, known as the interest spread, is the main source of income for the bank. For example, a bank might offer 4% interest on a savings deposit but charge 10% on a car loan.
5. What are the 'terms of credit'? Explain these terms using an example of a housing loan.
The 'terms of credit' are the conditions that a lender and borrower agree upon for a loan. They typically include:
- Interest Rate: The percentage charged by the lender for the use of their money.
- Collateral: An asset (like land, building, vehicle) that the borrower owns and pledges as a guarantee to the lender until the loan is repaid.
- Documentation: Required documents like ID proof, salary slips, and property papers.
- Mode of Repayment: The method and schedule of repayment, such as monthly instalments (EMIs) over a specific period.
For example, for a housing loan of ₹30 lakh, the terms of credit might be an interest rate of 8.5% per annum, the new house papers as collateral, and a repayment period of 20 years through monthly EMIs.
6. Differentiate between formal and informal sources of credit. Which one would be more beneficial for a small farmer and why?
The key differences between formal and informal sources of credit are:
- Regulation: Formal sources, like banks and cooperatives, are supervised by the Reserve Bank of India (RBI). Informal sources, such as moneylenders, traders, and relatives, are not regulated by any organisation.
- Interest Rates: Formal lenders charge lower and fixed interest rates as per RBI guidelines. Informal lenders often charge much higher and variable interest rates.
- Collateral: Formal sources usually require collateral and proper documentation. Informal sources may or may not require collateral, often lending based on personal familiarity.
For a small farmer, the formal sector is more beneficial. The lower interest rates prevent the farmer from falling into a debt trap, and the regulated terms ensure there is no exploitation.
7. Why do a large number of poor households in rural India still depend on informal sources of credit?
Despite the high interest rates, many poor rural households rely on informal credit for several important reasons:
- Lack of Collateral: Poor households often do not have assets like land or property to offer as collateral, which is a key requirement for bank loans.
- Difficult Documentation: The process of getting a loan from a bank involves extensive paperwork, which can be a major hurdle for illiterate or less-educated individuals.
- Accessibility: Banks are often not present in all remote villages, whereas local moneylenders are easily accessible.
- Flexibility: Moneylenders offer flexible and quick loans without long procedures, which is helpful during emergencies.
8. Explain the role of the Reserve Bank of India (RBI) in supervising the functioning of formal loan sources in India.
The Reserve Bank of India (RBI) plays a crucial supervisory role to ensure the stability and fairness of the formal credit sector. Its key functions include:
- Maintaining Cash Reserves: The RBI mandates that all banks must maintain a minimum cash balance out of the deposits they receive. This ensures the bank's liquidity.
- Monitoring Loan Distribution: The RBI monitors that banks give loans not just to profitable businesses and traders but also to small cultivators, small-scale industries, and other priority sectors.
- Regulating Interest Rates: The RBI sets guidelines for interest rates on loans and deposits to protect consumers from unfair practices.
- Auditing Banks: Banks are required to periodically submit information to the RBI on how much they are lending, to whom, and at what interest rate, ensuring transparency and compliance with rules for the 2025-26 financial year.
9. If the RBI's supervision is so important for the formal sector, why is it extremely difficult to regulate the informal credit sector?
Regulating the informal credit sector is a challenging task due to several factors:
- Lack of Organisation: The informal sector is not a single entity but consists of numerous small, scattered lenders like individual moneylenders, traders, and landlords.
- No Formal Records: Transactions are often based on verbal agreements and personal relationships, with little to no paperwork that can be audited.
- Geographical Spread: These lenders operate in every corner of the country, including remote and inaccessible areas, making physical monitoring by a central body like the RBI impractical.
- Social Integration: Informal lending is deeply integrated into the local social fabric, and borrowers might not report exploitative practices due to dependency or fear.
10. 'Self-Help Groups (SHGs) are the building blocks of organisation for the rural poor.' Analyse this statement by explaining any five objectives of SHGs.
This statement is accurate because SHGs empower the rural poor, especially women, by organising them at the grassroots level. Their main objectives are:
- To promote savings: To encourage members to save regularly, even in small amounts, and pool these savings together.
- To provide collateral-free loans: To offer timely loans to members from the pooled savings at a reasonable interest rate, meeting their credit needs without requiring any collateral.
- To build capacity: To provide a platform for members to discuss and act on various social issues like health, nutrition, and domestic violence.
- To foster self-reliance: To help members become financially independent by encouraging them to start small income-generating activities.
- To improve financial literacy: To develop the financial management skills of the members and reduce their dependence on informal moneylenders.
11. 'Credit can be both an asset and a debt trap.' Justify this statement with one example for each situation.
This statement is true because the outcome of credit depends on the purpose of the loan and the borrower's ability to repay it.
- Credit as an Asset: Credit is an asset when it helps increase future earnings. For example, a farmer takes a loan to buy high-quality seeds and fertiliser. The resulting successful harvest allows him to repay the loan and make a significant profit, improving his financial condition.
- Credit as a Debt Trap: Credit becomes a debt trap when the borrower is unable to repay the loan due to factors like crop failure or unexpected expenses. For instance, if the same farmer's crop fails due to a drought, he cannot repay the loan. To clear the first loan, he might be forced to take another loan, trapping him in a cycle of debt.
12. How is cheap and affordable credit crucial for a country's development? Give two reasons.
Cheap and affordable credit is vital for national development for the following reasons:
- Boosts Economic Activity: When credit is affordable, more people can borrow to start new businesses, expand existing ones, and buy goods like houses and cars. This increased spending and investment leads to higher production, job creation, and overall economic growth.
- Reduces Poverty and Inequality: Access to affordable loans allows poor and marginalised sections of society to invest in agriculture, small enterprises, or their children's education. This helps them increase their income, escape poverty, and reduces their dependence on exploitative informal lenders.

















