Money and Economy

Chapter Introduction and Summary

The chapter "Money and Economy" is a fundamental topic in Class 10 Social Science that explores the vital role of money in modern economic systems. This comprehensive study guide covers essential concepts including functions of money, banking systems, Reserve Bank of India (RBI), commercial banks, and financial inclusion initiatives in India.

Key Topics Covered:

• Functions and characteristics of money
• Role of money in economic transactions
• Reserve Bank of India and its functions
• Commercial and cooperative banking systems
• Credit systems and financial institutions
• Digital banking and modern payment methods
• Government initiatives for financial inclusion

This chapter helps students understand how money facilitates economic activities, the importance of banking institutions, and India's financial infrastructure that supports economic growth and development.

Question and Answer Study Material

Section 1: Introduction to Money

Q1. What is money? Why is it important in an economy?

Answer: Money is anything that is generally accepted in the exchange of goods and services. It is crucial because:

• It makes exchange of goods and services faster and easier
• It enables specialization in production
• It eliminates the difficulties of the barter system
• It facilitates countless transactions in the economy daily

Q2. How did money make specialization possible? Give an example.

Answer: Money made specialization possible by allowing producers to focus on what they do best and exchange their products for money, which can then be used to buy other needed goods and services. For example, rubber farmers can focus solely on rubber production, convert their rubber into money, and use that money to purchase food, clothing, and other necessities they don't produce themselves.

Section 2: Functions of Money

Q3. What are the four main functions of money? Explain each.

Answer: The four main functions of money are:

1. Medium of Exchange: Money facilitates the buying and selling of goods and services. People can sell their labor or products for money and use that money to purchase what they need.
2. Measure of Value: Money provides a common unit to express the value of all goods and services, making it easy to compare prices of different items.
3. Store of Value: Money allows people to save and store wealth for future use. Unlike perishable goods, money can preserve value over time.
4. Means of Deferred Payments: Money enables credit transactions where payments can be made at a later date, facilitating both short-term and long-term business deals.

Q4. What is the purchasing power of money? How does it change?

Answer: The purchasing power of money is its ability to buy goods and services - essentially, what money is worth in terms of goods. It changes inversely with price levels:

• When prices of goods increase, purchasing power of money decreases
• When prices of goods decrease, purchasing power of money increases
• These changes are most noticeable during inflation (rising prices) or deflation (falling prices)

Q5. List the essential characteristics that money should possess.

Answer: Money should have the following characteristics:

• Generally accepted by everyone
• Durable (should not deteriorate quickly)
• Portable (easy to carry)
• Divisible (can be broken into smaller units)
• Uniform (similar units should be identical)
• Limited in supply
• Stable in value

Section 3: Money and Economic Activity

Q6. How does money stimulate economic activities? Explain with the rice production example.

Answer: Money stimulates economic activities by connecting different sectors:

• A rice farmer needs fertilizers, seeds, machinery, and labor
• Money spent on these inputs becomes income for industrial sector (fertilizer, machinery producers)
• Transportation of rice to market provides income to service sector
• This income is then spent again in the economy, creating a multiplier effect
• Each transaction creates employment and income across different sectors

Q7. What is the velocity of circulation of money? What does it indicate?

Answer: The velocity of circulation of money refers to the number of times a unit of money is exchanged in a given period.

• High velocity indicates economic growth acceleration - more spending and transactions
• Low velocity indicates economic slowdown - less spending and fewer transactions
• It reflects the overall health and activity level of an economy

Section 4: Reserve Bank of India (RBI)

Q8. What is the Reserve Bank of India? When and where was it established?

Answer: The Reserve Bank of India (RBI) is India's central bank and the ultimate monetary authority. It was:

• Established on April 1, 1935, in Kolkata
• Created under the Reserve Bank of India Act, 1934
• Headquarters shifted to Mumbai in 1937
• Nationalized in 1949
• Currently headed by a Governor

Q9. List and explain the main functions of the Reserve Bank of India.

Answer: The main functions of RBI are:

1. Printing and Issuing Currency: RBI has exclusive power to print and issue all currency notes except coins and one-rupee notes (issued by Ministry of Finance)
2. Bankers' Bank: Provides emergency loans to banks, maintains bank reserves, and settles inter-bank transactions
3. Controls Money Supply and Credit: Regulates the amount of money in circulation to control inflation and maintain economic stability
4. Government's Bank: Maintains government accounts, provides banking services to government, and advises on fiscal and monetary policies
5. Custodian of Foreign Exchange: Manages India's foreign currency reserves and gold reserves
6. Publication of Reports: Publishes various economic reports and statistics

Q10. Who prints one-rupee notes and coins in India? Why?

Answer: The Government of India (Ministry of Finance) prints one-rupee notes and coins, not the RBI. This is due to historical reasons:

• The Paper Currency Act of 1835 gave the East India Company power to print paper currency
• The Coinage Acts of 1906 and 2011 gave the central government power to mint coins
• The government retains this historical power for one-rupee denominations

Section 5: Inflation and Monetary Control

Q11. What is inflation? How is it measured in India?

Answer: Inflation is the increase in the general price level of goods and services in an economy. In India, inflation is measured using:

• Consumer Price Index (CPI) prepared by the National Statistical Office
• Under the Ministry of Statistics and Programme Implementation (MOSPI)
• It tracks price changes of a basket of commonly used goods and services

Q12. What are M1, M2, M3, and M4? Differentiate between narrow money and broad money.

Answer: These represent different measures of money supply:

• M1 = Coins and currency notes with public + savings deposits in commercial banks
• M2 = M1 + savings deposits in post office savings banks
• M3 = M1 + net fixed deposits in commercial banks
• M4 = M3 + total deposits in post offices (excluding NSCs)

Classification:

• Narrow Money: M1 and M2 (highly liquid)
• Broad Money: M3 and M4 (includes less liquid assets)

Q13. What are repo rate and reverse repo rate? How do they help control inflation?

Answer:

• Repo Rate: Interest rate charged by RBI on loans given to commercial banks
• Reverse Repo Rate: Interest rate paid by RBI on deposits from commercial banks

Inflation Control Mechanism:

• When inflation rises, RBI increases both rates
• Higher rates make borrowing expensive for banks
• Banks reduce lending and increase deposits with RBI
• Less money circulates in the economy
• Reduced spending helps control inflation

Q14. What is Cash Reserve Ratio (CRR)? How does it affect money supply?

Answer: CRR is the percentage of deposits that banks must keep as reserves with RBI.

• When CRR decreases: Banks have more money to lend, increasing money supply
• When CRR increases: Banks have less money to lend, decreasing money supply
• It's a tool used by RBI to control liquidity in the banking system

Section 6: Commercial Banks

Q15. What are commercial banks? How are they different from cooperative banks?

Answer: Commercial Banks: Licensed by RBI, controlled by shareholders, operate for profit Cooperative Banks: Owned by cooperative society members, focus on community service

Examples of commercial banks include public sector banks (SBI), private banks (HDFC, ICICI), and foreign banks.

Q16. What are the different types of deposit accounts offered by commercial banks?

Answer:

• Savings Deposit:Promotes saving habit
• Limited withdrawals allowed
• Low interest rates
• Suitable for individuals
• Current Deposit:For business transactions
• Unlimited transactions
• No interest paid
• Overdraft facility available
• Fixed/Term Deposit:Money locked for specific period
• Higher interest rates
• Penalty for early withdrawal
• Good for long-term savings
• Recurring Deposit:Regular monthly deposits
• Fixed amount and period
• Higher interest than savings
• Helps build savings discipline

Q17. How do commercial banks make profit? What is 'spread'?

Answer: Commercial banks make profit through the difference between:

• Interest paid to depositors (lower rate)
• Interest charged from borrowers (higher rate)

This difference is called 'spread' - it's the bank's main source of income. Banks also earn from service charges, fees, and other banking services.

Section 7: Modern Banking Technology

Q18. What are the various digital payment systems introduced in Indian banking?

Answer:

1. NEFT (National Electronic Fund Transfer System): For electronic fund transfers using IFSC codes
2. RTGS (Real Time Gross Settlement): For large amount transfers in real-time
3. Core Banking: Allows transactions from any branch of the same bank
4. UPI (Unified Payment Interface): Real-time payment system through mobile apps (Google Pay, Paytm, PhonePe)
5. Online Banking: Internet-based banking services available 24/7

Q19. What are the advantages and challenges of digital banking?

Answer: Advantages:

• 24/7 availability
• Faster transactions
• Reduced costs
• Convenience and accessibility
• Personalized services

Challenges:

• Security risks and cyber fraud
• Digital divide
• Technical failures
• Need for digital literacy

Section 8: Credit Systems and Financial Inclusion

Q20. What are the formal and informal sources of credit in India?

Answer:

Formal Sources of Credit:

• Banks
• Non-banking financial institutions
• Self-help groups
• Microfinance institutions

Informal Sources of Credit:

• Local moneylenders
• Friends and relatives
• Other unorganized methods

Formal sources are regulated and organized, while informal sources are unregulated.

Q21. What is financial inclusion? What steps has the government taken to promote it?

Answer: Financial inclusion means ensuring that all sections of society have access to banking and financial services.

Government Steps:

1. Bank Nationalization (1969, 1980): To expand banking to rural areas
2. Cooperative Banking Systems: Community-based banking
3. Microfinance Programs: Small loans for poor
4. Jan Dhan Accounts: Zero minimum balance accounts
5. Digital Payment Systems: Cashless economy promotion
6. Self-Help Groups: Women empowerment through finance

Q22. What is microfinance? Give examples of successful microfinance initiatives.

Answer: Microfinance provides financial services to low-income individuals who cannot access conventional banking.

Objectives:

• Poverty alleviation
• Women empowerment
• Entrepreneurship promotion
• Job creation

Examples:

• Grameen Bank (Bangladesh) - founded by Muhammad Yunus
• Kudumbashree (Kerala) - works through neighborhood groups and self-help groups

Section 9: Case Studies and Applications

Q23. What was the 2016 demonetization? What were its objectives?

Answer: On November 8, 2016, the Government of India declared ₹500 and ₹1000 notes as no longer legal tender.

Objectives:

• Prevent corruption and black money
• Combat terrorism financing
• Eliminate counterfeit currency
• Promote digital payments

New ₹500 and ₹2000 notes were introduced, and people could exchange old notes until December 31, 2016.

Q24. What is KSFE? What services does it provide?

Answer: KSFE (Kerala State Financial Enterprise) is a non-banking financial company established in 1969.

Services Provided:

• Gold loans
• Personal loans
• Business loans
• Vehicle loans
• Housing loans
• Microfinance
• Chit fund services

It has a strong presence in Kerala through its branch network.

Section 10: Economic Analysis

Q25. What is Credit Deposit Ratio? What does a high or low ratio indicate?

Answer: Credit Deposit Ratio measures the proportion of bank deposits that are converted into loans.

• High Ratio: Banks are lending most of their deposits (good for economic growth but risky)
• Low Ratio: Banks are conservative in lending (safer but may indicate economic slowdown)

RBI monitors this ratio to ensure banking stability.

Q26. Analyze the trend in credit sources in Kerala from 2019-2021 based on the given data.

Answer: From the data provided:

• Bank lending decreased from 68.55% to 44.51%
• Self-help groups increased dramatically from 8.8% to 41.53%
• Non-bank financial institutions fluctuated
• Local moneylenders decreased from 8.04% to 4.43%

This shift suggests people moved toward community-based financing during the period, possibly due to easier access or pandemic-related changes in formal banking.

Key Terms Glossary

• Inflation: General increase in price levels
• Deflation: General decrease in price levels
• Monetary Policy: RBI's policy on money supply and interest rates
• Fiscal Policy: Government's policy on taxation and spending
• Liquidity: How easily assets can be converted to cash
• Financial Inclusion: Making financial services accessible to all
• Digital Currency: Electronic form of money
• Microfinance: Small-scale financial services for the poor

Important Formulas and Relationships

1. Money Supply: M1 < M2 < M3 < M4
2. Bank Profit: Spread = Interest Charged - Interest Paid
3. Purchasing Power: Inversely related to price level
4. Velocity of Money: Higher velocity = More economic activity

Tips for Exam Preparation

1. Understand concepts rather than memorizing
2. Practice case study analysis with real examples
3. Keep updated with current economic news
4. Draw diagrams to explain money flow in economy
5. Connect theory with practical applications
6. Focus on RBI functions as they're frequently asked
7. Understand the relationship between inflation and monetary policy

This study guide covers all major concepts from the Money and Economy chapter. Regular revision and practice with these questions will help you excel in your Class 10 Social Science examination.