Economics

Chapter– 3 Money And Credit

Money: Money may be defined as anything which is generally accepted by the people in exchange of goods and services or in repayment of debts.Barter System: It implies direct exchange of goods against goods without use of money is called barter exchange. It is also called C.C. economy (Commodity for commodity exchange economy).Demand Deposits: Deposits in a bank which are payable on demand are called demand deposits. It also provides the facility of medium of exchange which is a function of money, when payments are made by cheques.Cheque: It 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.Formal Sector Credit in India: It includes loans from banks and cooperatives. RBI supervises their functions of giving loans. Rich urban households depend largely on formal sources of credit. Lower rate of interest on loans is charged as compared to informal sources of credit.

Informal Sector Credit in India: It includes traders, employers, moneylenders, relatives, friends, etc. No organization is there to supervise its lending activities. Higher interest on loans is charged as compared to formal sources of credit. Poor households largely depend on informal sources of credit.Self Help Groups (SHG): It helps in pooling the saving of the members, who are poor women. Members can get timely loans for a variety of purpose and at a reasonable rate of interest. It helps borrowers to overcome the problem of lack of collateral. It also provides a platform to discuss variety of social issues of their concern.Chit fund: Chit means a transaction under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain amount of money by ways of periodic installments over a definite period. Reasonable rate of interest is charged against the loan taken by subscriber members.

Q.1. Why are demand deposits considered as money?

Ans.Deposits in a bank which are payable on demand are called demand deposits. It also provides the facility of medium of exchange which is a function of money, when payments are made by cheques

Q. 2.What are the limitations of the barter system?

1. Two people with different type of needs and goods must be there to satisfy each other’s needs.
2. There are many products which cannot be divided.
3. Valuation of goods is very difficult.
4. Barter system is consumable.

Q. 3 .What are demand deposits? What are their advantages? Why are demand deposits considered as money?

Ans.The deposits in the bank accounts which can be withdrawn on demand are known as demand deposits.

1. People earn interest on the demand deposits.
2. The depositor can make the payment through a cheque.

It is considered as money :

1. They can be used as a medium of exchange.
2. They are easily acceptable.
3. They help in settling payment without the use of cash.

Q. 4.

Ans.

1. It is the safer place to keep money as compared to the house or a working place.
2. People can earn interest on the deposited money.
3. People have the provisions to withdrawn the money as and when they require.
4. People can also make payment through cheques.

Q.5.What is collateral?

Ans.

1. Collateral is an asset that the borrower owns (such as land, building, vehicles, 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 the collateral to obtain the payment. Property such as land, livestock etc are some of the common examples of collateral used for borrowing.