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Money and Credit Book PDF Free Download
Chapter 3: Money and Credit
The use of money spans a very large part of our everyday life. Look around you and you would easily be able to identify several transactions involving money in any single day. Can you make a list of these? In many of these transactions, goods are being bought and sold with the use of money. In some of these transactions, services are being exchanged with money.
For some, there might not be any actual transfer of money taking place now but a promise to pay money later. Have you ever wondered why transactions are made in money? The reason is simple. A person holding money can easily exchange it for any commodity or service that he or she might want. Thus everyone prefers to receive payments in money and then exchange the money for things that they want. Take the case of a shoe manufacturer.
He wants to sell shoes in the market and buy wheat. The shoe manufacturer will first exchange shoes that he has produced for money, and then exchange the money for wheat. Imagine how much more difficult it would be if the shoe manufacturer had to directly exchange shoes for wheat without the use of money. 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. This is known as double coincidence of wants. What a person desires to sell is exactly what the other wishes to buy. In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. In contrast, in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants. It is no longer necessary for the shoe manufacturer to look for a farmer who will buy his shoes and at the same time sell him wheat.
All he has to do is find a buyer for his shoes. Once he has exchanged his shoes for money, he can purchase wheat or any other commodity in the market. Since money acts as an intermediate in the exchange process, it is called a medium of exchange. We have seen that money is something that can act as a medium of exchange in transactions. Before the introduction of coins, a variety of objects was used as money.
For example, since the very early ages, Indians used grains and cattle as money. Thereafter came the use of metallic coins — gold, silver, copper coins — a phase which continued well into the last century. Currency Modern forms of money include currency — paper notes and coins. Unlike the things that were used as money earlier, modern currency is not made of precious metal such as gold, silver and copper.
And unlike grain and cattle, they are neither of everyday use. The modern currency is without any use of its own. Then, why is it accepted as a medium of exchange? It is accepted as a medium of exchange because the currency is authorised by the government of the country. In India, the Reserve Bank of India issues currency notes on behalf of the central government. As per Indian law, no other individual or organisation is allowed to issue currency.
Moreover, the law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India. No individual in India can legally refuse a payment made in rupees. Hence, the rupee is widely accepted as a medium of exchange. Deposits with Banks The other form in which people hold money is as deposits with banks.
At a point of time, people need only some currency for their day-to-day needs. For instance, workers who receive their salaries at the end of each month have extra cash at the beginning of the month. What do people do with this extra cash? They deposit it with the banks by opening a bank account in their name. Banks accept the deposits and also pay an amount as interest on the deposits.
In this way people’s money is safe with the banks and it earns an amount as interest. People also have the provision to withdraw the money as and when they require. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.
| Author | NCERT |
| Language | English |
| No. of Pages | 16 |
| PDF Size | 0.6 MB |
| Category | Social Science |
| Source/Credits | ncert.nic.in |
NCERT Solutions Class 11 Social Science Chapter 3 Money and Credit
Question 1: In situations with high risks, credit might create further problems for the borrower. Explain?
Answer:
- High-risk situations occur in rural areas because there the main demand for credit is for crop production which involves considerable costs on seeds, fertilisers, pesticides, water, electricity, repair of equipment.
- There is a minimum stretch of three of four months between the time when farmers buy these inputs and when they sell the crop.
- Farmers generally take crop loans at the beginning of the season and repay the loan after harvest.
- Repayment of the loan is crucially dependent on the income from farming.
- If a crop fails due to shortage of rain or for any other reason, a small farmer has to sell a part of the land to repay the loan.
- Failure of crops create further problems for the borrowers. Credit does not improve his earnings but leaves him worse off than before. Credit in high risks situations pushes the borrower into a debt trap, a situation from which recovery is very painful.
Question 2: How does money solve the problem of double coincidence of wants? Explain with example of your own.
Answer:
In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. By serving as a medium of exchanges, money removes the need for double coincidence of wants and the difficulties associated with the barter system. For example, it is no longer necessary for the farmer to look for a book publisher who will buy his cereals at the same time sell him books. All he has to do is find a buyer for his cereals. If he has exchanged his cereals for money, he can purchase any goods or service which he needs. This is because money acts as a medium of exchange.
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