MONEY AND CREDIT..................Part I

SUMMARY OF THE TOPICS  ON WHICH QUESTIONS AND ANSWERS ARE GIVEN: 

MONEY AS A MEDIUM OF EXCHANGE
MODERN FORMS OF MONEY
LOAN ACTIVITIES OF BANKS
TWO DIFFERENT CREDIT SITUATIONS
TERMS OF CREDIT
FORMAL SECTOR CREDIT IN INDIA
SELF-HELP GROUPS FOR THE POOR


I. Answer the following questions : 

Q1. What is money? Why is modern money currency accepted as a medium of exchange?

or 

How money serves as a medium of exchange?

1. Modern forms of money include currency — paper notes and coins.
2. It is accepted as a medium of exchange because the currency is authorised by the government of the country.
3. People exchange goods and services through the medium of money.
4. A person holding money can exchange it for any commodity or service that he or she might want.
5. Thus everyone prefers to receive payments in money and then
   exchange the money for things that they want.  

Q2. What do you understand by double coincidence of wants? How does money solves the problem of  double coincidence of wants?

1. What a person desires to sell is exactly what the other wishes to buy is known as double coincidence of wants.
2. In a barter system goods are directly exchanged without the use of money, double coincidence of wants is an essential feature.
3. For example :- A shoe manufacturer  wants to sell shoes and buy wheat than he would have to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy the shoes in exchange.That is, both parties have to agree to sell and buy each others commodities. 
4. But in an economy where money is used as a medium of exchange, the shoe manufacturer will first exchange shoes that he has produced for money, and then exchange the money for wheat.
5. Thus money solves the problem of  double coincidence of wants.

Q3. Why  rupee is accepted as a medium of exchange?

1. Rupee  is accepted as a medium of exchange because it is authorised by the government of India.
2. In India, the Reserve Bank of India issues currency notes on behalf of the central government. 
3. As per Indian law, no other individual or organisation is allowed to issue currency.
4. The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India. 
5. No individual in India can legally refuse a payment made in rupees. 
6. Hence, rupee is accepted as a medium of exchange.

Q4. What is a Cheque? 

1. 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.

Q5. What are the demand deposits?

1. Money deposited in the Bank account which is payable on demand is called as demand deposits.
2. People deposit extra cash with the banks by opening a bank account in their name. 
3. Banks accept the deposits and also pay an interest rate on the deposits. 
4. In this way people’s money is safe with the banks and it earns an interest.
5. People can withdraw the money as and when they require.

Q6. What do the banks do with the deposits which they accept from the public?

or

How do banks mediate between those who have surplus money  and those who need money?

1. People deposit extra cash with the banks by opening a bank account in their name.
2. Banks keep  a small proportion of these deposits as cash with themselves as provision to pay the depositors who might come to withdraw money from the bank on any given day.
3. For example, banks in India these days hold about 15 per cent of their deposits as cash.
4. Banks make use of the deposits to meet the loan requirements of the people. 
5. The banks mediate between those who have surplus funds, the depositors and those who are in need of these funds,the borrowers. 
6. Banks charge a higher interest rate on loans than what they offer on deposits.
7. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

Q7. What is credit? What do you understand by 'terms of credit'?

1. 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.
2. Interest rate, collateral and documentation requirement, and the
   mode of repayment together comprise the 'terms of credit'.  
3. The terms of credit vary from one credit arrangement to another.
4. They may vary depending on the nature of the lender and the borrower.

Q8. What is collateral? 

1. Collateral is an asset that the borrower owns such as land,
   building, vehicle, livestock, deposits with banks and uses this
   as a guarantee to a lender until the loan is repaid.
2. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment.