CBSE Class 10 Social Science (Economics – Understanding Economic Development)
Chapter 3: Money and Credit
20 Important Questions and Answers
As per CBSE 2026–27 Syllabus
Q1. What are the major drawbacks of the barter system?
Answer:
The barter system is a method of exchange in which goods are exchanged directly for other goods without using money. It has several drawbacks. First, it requires a double coincidence of wants, meaning both parties must want what the other has. Second, there is no common measure of value to compare different goods. Third, many goods cannot be divided easily for exchange. Fourth, storing wealth in the form of goods is difficult because goods may perish or lose value over time. Due to these problems, the barter system became inefficient and was gradually replaced by the use of money.
Q2. Why is money considered a medium of exchange?
Answer:
Money is considered a medium of exchange because it is accepted as payment for goods and services by everyone. Instead of exchanging goods directly, people use money to buy what they need. This removes the problem of double coincidence of wants that existed in the barter system. For example, a farmer can sell wheat for money and then use that money to buy clothes or other necessities. Money simplifies transactions, saves time, and makes trade more convenient. Because it is widely accepted and easy to carry, money plays a crucial role in facilitating economic activities in society.
Q3. Explain the modern forms of money.
Answer:
Modern forms of money include currency notes, coins, and bank deposits. Currency notes and coins are issued by the government and the Reserve Bank of India and are accepted as legal tender. Bank deposits are another important form of money. People deposit their savings in banks, and these deposits can be withdrawn when needed. Deposits can also be used through cheques, debit cards, internet banking, and mobile banking. Since bank deposits can be used to make payments and purchase goods and services, they are considered money. Modern forms of money make transactions safer, faster, and more convenient than carrying large amounts of cash.
Q4. What are demand deposits? Why are they considered money?
Answer:
Demand deposits are the money deposited by people in bank accounts that can be withdrawn at any time without prior notice. These deposits are available on demand, which is why they are called demand deposits. They are considered money because they can be used directly for making payments through cheques, debit cards, or online transfers. Instead of carrying cash, people can use their bank deposits to purchase goods and services. Demand deposits are safe and convenient and form an important part of the modern banking system. They increase the efficiency of transactions and help promote economic activities.
Q5. What are the two main functions of banks?
Answer:
The two main functions of banks are accepting deposits and providing loans. Banks accept deposits from people who wish to save their money safely. These deposits can be withdrawn whenever needed. The second important function is lending money. Banks use a portion of the deposited money to provide loans to individuals, businesses, farmers, and industries. Through lending, banks help finance economic activities and promote growth. By connecting savers and borrowers, banks play a crucial role in the economy. They ensure that money is used productively instead of remaining idle and contribute to the development of various sectors.
Q6. How do banks create credit?
Answer:
Banks create credit by lending a major portion of the money deposited by customers. When people deposit money, banks keep only a small fraction as reserves and lend the remaining amount to borrowers. These borrowers use the money for business, agriculture, education, or other purposes. The loans provided by banks become deposits in other bank accounts, allowing further lending. This process increases the availability of money in the economy and is known as credit creation. Credit creation helps businesses expand, generates employment, and supports economic growth. Thus, banks play an important role in increasing the flow of money in the economy.
Q7. What is credit? How can it be useful?
Answer:
Credit refers to an agreement in which a lender provides money, goods, or services to a borrower with the promise of repayment in the future, usually with interest. Credit can be useful because it helps individuals and businesses meet their financial needs. Farmers use credit to buy seeds and fertilizers, students use it for education, and businesses use it for expansion. Credit allows people to invest in productive activities and improve their income. When used wisely, credit supports economic growth and development. It provides opportunities that may not be possible through personal savings alone.
Q8. How can credit have a negative impact on borrowers?
Answer:
Credit can have a negative impact when borrowers are unable to repay their loans. In such situations, they may fall into a debt trap where they must borrow more money to repay existing loans. High interest rates charged by informal lenders worsen the situation. For example, if a farmer’s crop fails, he may not earn enough income to repay the loan. As debts accumulate, borrowers may lose their assets or face financial difficulties. Therefore, while credit can be beneficial, it can also become a burden if not managed carefully or if the borrower experiences unexpected losses.
Q9. What is the difference between formal and informal sources of credit?
Answer:
Formal sources of credit include banks and cooperative societies, while informal sources include moneylenders, traders, employers, relatives, and friends. Formal sources are regulated by the government and the Reserve Bank of India. They usually charge lower interest rates and follow transparent rules. Informal sources are not regulated and often charge very high interest rates. Borrowers from informal sources may face exploitation and unfair conditions. Formal credit is generally safer and more reliable. Expanding access to formal credit is important because it helps people obtain loans at reasonable rates and reduces dependence on informal lenders.
Q10. Why do poor households depend on informal sources of credit?
Answer:
Poor households often depend on informal sources of credit because they may not meet the requirements set by banks. Banks usually ask for documents, collateral, and proof of income before granting loans. Poor families often lack these resources. Informal lenders provide loans quickly and with fewer formalities, making them more accessible. However, they charge high interest rates and may impose unfair conditions. As a result, borrowers often struggle to repay the loans and become trapped in debt. Increasing access to formal banking services can help poor households obtain affordable credit and improve their financial condition.
Q11. What is collateral? Why is it important?
Answer:
Collateral is an asset that a borrower pledges to a lender as security for a loan. It may include land, property, vehicles, gold, or other valuable assets. If the borrower fails to repay the loan, the lender has the right to sell the collateral to recover the money. Collateral is important because it reduces the risk faced by lenders and increases the chances of loan approval. Banks often require collateral before granting large loans. However, poor people who do not own valuable assets may find it difficult to obtain loans, which limits their access to formal credit.
Q12. What is a Self-Help Group (SHG)?
Answer:
A Self-Help Group (SHG) is a small group of people, usually women, who come together to save money regularly and provide loans to members from their collective savings. SHGs promote financial inclusion and encourage people to develop saving habits. Members can borrow money for personal needs, education, healthcare, or small businesses. Banks often support SHGs by providing additional loans. SHGs help reduce dependence on moneylenders and improve access to affordable credit. They also promote cooperation, self-reliance, and empowerment among members, especially women in rural and economically weaker communities.
Q13. How do Self-Help Groups help rural women?
Answer:
Self-Help Groups help rural women by providing access to savings and credit facilities. Women contribute small amounts regularly and can borrow money when needed. This helps them start small businesses, meet household expenses, and improve their standard of living. SHGs reduce dependence on moneylenders who charge high interest rates. They also promote confidence, leadership, and decision-making skills among women. Through group meetings, women share experiences and support one another. Many SHGs receive assistance from banks, increasing their financial opportunities. As a result, SHGs contribute significantly to the economic and social empowerment of rural women.
Q14. Why is formal credit important for economic development?
Answer:
Formal credit is important because it provides loans at reasonable interest rates and under regulated conditions. It enables farmers, businesses, and individuals to invest in productive activities such as agriculture, education, and entrepreneurship. Formal credit helps increase production, employment, and income levels. Since banks and cooperative societies follow transparent rules, borrowers are protected from exploitation. Easy access to formal credit reduces dependence on informal lenders and supports inclusive growth. By ensuring that financial resources reach different sections of society, formal credit contributes significantly to economic development and poverty reduction.
Q15. What is the role of the Reserve Bank of India in the credit system?
Answer:
The Reserve Bank of India (RBI) is the central bank of the country and regulates the banking system. It supervises banks and ensures that they follow government policies and financial regulations. The RBI controls the amount of money in circulation and monitors lending activities. It issues currency notes and sets guidelines for interest rates and reserve requirements. The RBI also promotes financial stability and protects the interests of depositors. Through its regulatory functions, it ensures that banks operate safely and efficiently. This helps maintain confidence in the financial system and supports economic growth.
Q16. Why are bank deposits considered safer than keeping cash at home?
Answer:
Bank deposits are considered safer because banks provide secure facilities for storing money. Keeping large amounts of cash at home increases the risk of theft, loss, or damage. Banks protect deposits and allow account holders to withdraw money whenever required. Depositors may also earn interest on their savings, which helps increase their wealth over time. In addition, banking services such as online transfers, debit cards, and mobile banking make transactions convenient. Therefore, depositing money in banks offers both safety and financial benefits, making it a preferred option for managing savings.
Q17. Explain the term ‘debt trap’.
Answer:
A debt trap is a situation in which a borrower becomes unable to repay existing loans and is forced to borrow more money to meet repayment obligations. This cycle of borrowing and repayment continues, increasing the burden of debt. Debt traps often occur when borrowers take loans at high interest rates from informal lenders. Unexpected events such as crop failure, illness, or unemployment can make repayment difficult. As debts grow, borrowers may lose their assets or face severe financial hardship. Access to affordable credit and proper financial planning can help prevent debt traps.
Q18. How do banks contribute to economic growth?
Answer:
Banks contribute to economic growth by mobilizing savings and providing credit for productive activities. They collect deposits from individuals and lend money to farmers, businesses, industries, and entrepreneurs. This financial support helps increase production, create jobs, and improve incomes. Banks also facilitate trade and investment through modern payment systems. By providing financial services, they encourage entrepreneurship and innovation. Efficient banking systems ensure that money is used productively within the economy. As a result, banks play a key role in promoting economic development and improving the overall standard of living.
Q19. Why should credit be available to all sections of society?
Answer:
Credit should be available to all sections of society because it helps people invest in productive activities and improve their economic condition. Farmers need credit for cultivation, students for education, and entrepreneurs for starting businesses. If only wealthy people receive loans, economic opportunities remain limited for poorer sections. Equal access to credit promotes social justice and inclusive development. Affordable credit enables people to increase their income and reduce poverty. Therefore, expanding access to formal credit services is essential for balanced economic growth and improving the quality of life of all citizens.
Q20. How does money solve the problem of double coincidence of wants?
Answer:
The problem of double coincidence of wants arises in a barter system when two people must each want what the other possesses. Money solves this problem by acting as a common medium of exchange. A person can sell goods or services for money and then use that money to buy whatever is needed from someone else. There is no requirement for both parties to want each other’s goods at the same time. This makes transactions simpler, faster, and more efficient. By eliminating the limitations of barter, money facilitates trade and supports economic development in modern societies.