EXERCISE

Very short answer questions 

Q1. What is barter?
Answer: Barter is the direct exchange of goods for other goods, or commodities for other commodities.

Q2. What is money?
Answer: According to Geoffrey Crowther, money is anything that is generally acceptable as a medium of exchange.

Q3. Mention one important function of money.
Answer: One important function of money is that it acts as a medium of exchange, making transactions easier than in a barter system.

Q4. Give an example of non-legal tender money.
Answer: A cheque is an example of non-legal tender money because its acceptance as a medium of exchange is not backed by law.

Q5. What is representative paper money?
Answer: Representative paper money is an early form of paper money that was convertible into an equivalent value of gold or silver.

Q6. What is a bank?
Answer: A bank is a financial institution that deals in loans by collecting savings from depositors and lending a portion of these savings to borrowers.

Q7. In which year was the Reserve Bank of India set up?
Answer: The Reserve Bank of India (RBI) was set up in 1935.

Q8. What is current deposit?
Answer: A current deposit is a type of savings that a depositor can withdraw at any time without prior intimation to the bank.

Short answer type questions

Q1. How does the lack of double coincidence of wants create problems in the barter system?
Answer: The barter system requires a “double coincidence of wants,” which means that for an exchange to occur, two people must each want what the other has. For example, if Person A has rice and wants sugarcane, they need to find Person B who has sugarcane and wants rice. A problem arises when Person B wants something else, like fish, which Person A does not have. This lack of mutual wants makes direct exchange difficult, if not impossible.

Q2. What is meant by store of value?
Answer: A store of value is the ability of an asset, like money, to hold its value over time and be saved for future use. In a barter system, commodities were used to store value, but they were often perishable (like fish or eggs), making long-term saving difficult. Money, however, is durable and can be stored up, making saving possible and easy.

Q3. Which characteristic of money is the most important one and why?
Answer: The most important characteristic of money is general acceptability. This means that everyone must be willing to accept it as a medium of exchange. In India, general acceptability is supported by law, meaning that refusing to accept it for payment is a violation of the law. Without this characteristic, money would lose its function as a medium of exchange, and the entire monetary system would break down.

Q4. What is liquidity of money?
Answer: The liquidity of money refers to its ability to be directly and immediately converted into goods and services that the holder desires. Money has the highest degree of liquidity compared to other assets like land or gold because you don’t need to sell it first to get what you want. You can use money directly to buy things.

Q5. ‘Money is the common unit of measurement of the value of goods and services.’ Explain.
Answer: Money serves as a common unit of account, which means it provides a standard measure for the value of all goods and services in an economy. This solves a major problem of the barter system, where the value of each commodity had to be expressed in terms of many other commodities, making it difficult to keep track of all the exchange rates. In a money economy, the value of every commodity is expressed as a price in a common unit (money), which simplifies economic transactions and calculations.

Q6. What is the difference between limited and unlimited legal tender?
Answer: Limited legal tender is money that can only be used to settle transactions up to a certain value. For example, if someone pays a large sum like ₹10 lakh entirely in small coins, it would be impractical and cumbersome, so these coins are limited legal tender. Unlimited legal tender, on the other hand, is money that can be used to settle transactions of any value, whether small or large (e.g., ₹10 lakh or ₹100 crore).

Q7. What are the functions of the Regional Rural Banks?
Answer: The Regional Rural Banks (RRBs) were first set up in 1975 to serve rural areas. Their two main functions are:

1. To provide loans at low interest rates to villagers, thereby protecting them from private money lenders who charge very high rates.
2. To mobilize savings from rural areas and invest them in productive activities.

Q8. How are the Non Banking Financial Institutions different from the banks?
Answer: Non-Banking Financial Institutions (NBFIs) are different from banks in two main ways:

1. Cheque Facility: While depositors can withdraw money from banks using a cheque, NBFI depositors cannot.
2. Deposit Insurance: Banks have a Deposit Insurance Scheme that covers the risk for depositors, but NBFIs do not have such a scheme.

Long answer type questions

Q1. Explain four demerits of the barter system.
Answer: The barter system, a direct exchange of goods for goods, faced several major problems that eventually led to its breakdown. Four key demerits are:

1. Lack of Double Coincidence of Wants: This was the biggest problem. For an exchange to happen, both parties had to want exactly what the other person had.
2. Lack of a Common Unit of Account: The barter system lacked a standard measure of value. The value of each good had to be expressed in terms of every other good.
3. Problem of Indivisibility: It was difficult to exchange indivisible goods. For example, a person with an elephant who wants a loaf of bread could not easily make the trade.
4. Lack of a Store of Value: In a barter system, saving was done by storing commodities. However, most goods are perishable, making saving difficult and unreliable.

Q2. Explain any four characteristics of money.
Answer: Money has several characteristics that enable it to perform its functions effectively. Four important ones are:

1. General Acceptability: Money must be universally accepted as a medium of exchange.
2. Durability: Money must be durable and not perishable.
3. Divisibility: Money must be divisible, meaning it can be broken down into smaller denominations.
4. Liquidity: Money must be liquid, which means it can be directly and instantly converted into goods and services.

Q3. Explain four major functions of money.
Answer: A popular couplet summarizes the four main functions of money: “Money is a matter of functions four – a medium, a measure, a standard, and a store”.

1. Medium of Exchange: Money facilitates transactions by acting as a medium.
2. Measure of Value: Money provides a standard unit to express the value of all goods and services.
3. Standard of Deferred Payments: Money serves as a standard for future payments.
4. Store of Value: Money allows individuals to save and store value over time.

Q4. Is cheque money? Give reasons for your answer.
Answer: No, a cheque is not considered money because it lacks general acceptability. A person can legally refuse a payment made by cheque. A cheque is merely a claim against money that must be cashed at a bank to become actual money.

Q5. Mention four problems associated with money.
Answer: Four problems associated with money are:

1. Instability of Value: Inflation or deflation can reduce purchasing power.
2. Concentration of Economic Power: Wealth may become concentrated in few hands.
3. Erosion of Social Values: Excessive pursuit of money can harm societal norms.
4. Black Money: Money earned illegally causes revenue loss and economic issues.

Q6. Explain any four functions of the Central Bank.
Answer: The Central Bank, like RBI, performs key functions:

1. Issuing Currency: Monopoly right to issue currency.
2. Controlling Credit: Regulates the money supply and credit in the economy.
3. Banker to Banks: Acts as lender of last resort.
4. Financier, Advisor, and Agent to the Government: Provides loans, advises on policy, and manages accounts.

Q7. Explain any two major functions of the commercial banks.
Answer: Commercial banks perform:

1. Mobilising Savings: Collect savings through deposits to fund loans.
2. Offering Loans: Provide loans to farmers, artisans, and industrialists to boost economic activity.

Q8. Briefly explain any two functions of each of the following:

(i) IDBI:

1. Providing Financial Assistance: Offers direct and indirect loans for industrial development.
2. Promoting Entrepreneurship: Offers training and concessional loans to promote industries.

(ii) RRBs:

1. Providing Rural Loans: Offers low-interest loans to villagers.
2. Mobilizing Rural Savings: Collects and invests savings in productive activities.

(iii) NABARD:

1. Apex Financial Institution: Top financial institution for rural development.
2. Monitoring Rural Schemes: Organizes training and monitors rural projects.

(iv) SIDBI:

1. Promoting Modernization: Encourages modern technology in small industries.
2. Creating Employment: Provides employment opportunities to prevent migration.