MCQs – Class 10 Economics Chapter 3: Money and Credit | CBSE | GPN

🧠 Multiple Choice Questions (MCQs) - Chapter 3: Money and Credit

This set of 30 questions evaluates your understanding of money as a medium of exchange, modern forms of money, banking systems, credit, and its role in development as per the CBSE syllabus.

Standard MCQs (1 Mark Each)

Choose the single correct option for questions 1 to 15.

Which of the following is not a function of money?

(a) Medium of exchange

(b) Store of value

(c) Double coincidence of wants

(d) Standard of deferred payment

Answer: (c) Double coincidence of wants
Explanation: Double coincidence of wants is a problem in the barter system that money solves. The main functions of money are: medium of exchange, store of value, unit of account, and standard of deferred payment.
In India, which institution issues currency notes?

(a) Reserve Bank of India

(b) State Bank of India

(c) Government of India

(d) Ministry of Finance

Answer: (a) Reserve Bank of India
Explanation: The Reserve Bank of India (RBI) has the sole authority to issue currency notes on behalf of the Central Government. One rupee notes are issued by the Ministry of Finance, but all other notes are issued by RBI.
Which of these is an example of modern form of money?

(a) Gold coins

(b) Silver ornaments

(c) Demand deposits

(d) Animal skins

Answer: (c) Demand deposits
Explanation: Modern forms of money include currency (paper notes and coins) and deposits with banks (demand deposits). Gold, silver, and animal skins were used in earlier systems.
Cheques are:

(a) Paper currency

(b) Commodity money

(c) A means of transferring money between bank accounts

(d) Issued by the government

Answer: (c) A means of transferring money between bank accounts
Explanation: A cheque is an instruction to the bank to pay a specific amount from the person's account to the person in whose name the cheque has been issued. It facilitates payment without using cash.
What is collateral?

(a) Interest charged on loans

(b) An asset owned by the borrower used as guarantee to a lender

(c) The person who guarantees a loan

(d) Monthly installment of loan

Answer: (b) An asset owned by the borrower used as guarantee to a lender
Explanation: Collateral is an asset (like land, building, vehicle, or deposits) that the borrower owns and uses as a guarantee to the lender until the loan is repaid. If the borrower fails, the lender can sell the collateral.
Which system requires the double coincidence of wants?

(a) Money economy

(b) Credit system

(c) Barter system

(d) Banking system

Answer: (c) Barter system
Explanation: In barter system, goods are directly exchanged without money. This requires double coincidence of wants - each party must have what the other wants and want what the other has, which is difficult to achieve.
Which of these is a formal source of credit?

(a) Money lender

(b) Relative

(c) Trader

(d) Commercial Bank

Answer: (d) Commercial Bank
Explanation: Formal sources of credit include banks and cooperatives which are regulated by RBI. Informal sources include moneylenders, traders, relatives, and landlords who are not regulated.
SHG stands for:

(a) Self-Help Group

(b) Small Housing Group

(c) State Housing Grant

(d) Social Help Group

Answer: (a) Self-Help Group
Explanation: SHG stands for Self-Help Group, typically comprising 15-20 members from poor households who pool their savings and provide loans to members without collateral, promoting financial inclusion.
The interest rate on loans charged by informal lenders is usually:

(a) Lower than formal lenders

(b) Higher than formal lenders

(c) Same as formal lenders

(d) No interest charged

Answer: (b) Higher than formal lenders
Explanation: Informal lenders (moneylenders, traders) charge much higher interest rates (3-5% per month or more) compared to formal sources (10-15% per annum) because they are unregulated and often exploit poor borrowers.
Which of the following is not a modern banking facility?

(a) ATM

(b) Internet banking

(b) Credit card

(d) Barter exchange

Answer: (d) Barter exchange
Explanation: ATM, internet banking, and credit cards are modern banking facilities. Barter exchange is an ancient system of direct goods exchange without money, not a banking facility.
What is the main source of income for banks?

(a) Service charges

(b) Difference between interest charged on loans and interest paid on deposits

(c) Government subsidies

(d) Foreign aid

Answer: (b) Difference between interest charged on loans and interest paid on deposits
Explanation: Banks accept deposits at lower interest rates and lend money at higher interest rates. The difference between these rates (interest margin) is their main income source, after keeping some cash reserves.
Why do banks keep a portion of deposits as cash reserve?

(a) To earn more interest

(b) To pay salaries to bank employees

(c) To meet the daily withdrawal demands of depositors

(d) To invest in shares

Answer: (c) To meet the daily withdrawal demands of depositors
Explanation: Banks keep about 15% of deposits as cash reserve (as mandated by RBI) to meet daily withdrawal requirements of customers. The remaining deposits are lent out to earn interest.
Which of these people would find it difficult to get loans from formal sources?

(a) A businessperson with proper accounts

(b) A salaried employee with fixed income

(c) A landless agricultural laborer

(d) A government officer

Answer: (c) A landless agricultural laborer
Explanation: Formal sources require collateral, proper documentation, and repayment capacity. Landless laborers lack collateral and stable income, forcing them to rely on expensive informal credit.
What is credit?

(a) An agreement where lender provides money, goods or services to borrower who promises future repayment

(b) Money kept in bank account

(c) Government subsidy

(d) Foreign investment

Answer: (a) An agreement where lender provides money, goods or services to borrower who promises future repayment
Explanation: Credit (loan) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment with interest.
The 'terms of credit' include:

(a) Interest rate only

(b) Collateral, documentation, interest rate and mode of repayment

(c) Only collateral requirement

(d) Borrower's name and address

Answer: (b) Collateral, documentation, interest rate and mode of repayment
Explanation: Terms of credit are the requirements that must be satisfied to get credit. These include interest rate, collateral, documentation, and repayment terms that the borrower must accept.

Assertion-Reasoning Questions (1 Mark Each)

Directions: For questions 16 to 25, a statement of Assertion (A) is followed by a statement of Reason (R). Choose the correct option:

(a) Both A and R are true and R is the correct explanation of A

(b) Both A and R are true but R is NOT the correct explanation of A

(d) A is false but R is true

Assertion (A): Money acts as an intermediate in the exchange process.
Reason (R): It eliminates the need for double coincidence of wants.
Answer: (a) Both A and R are true and R is the correct explanation of A
Explanation: Money serves as a medium of exchange (intermediate) because everyone accepts it for goods/services. This eliminates the barter problem of double coincidence of wants, as R explains.
Assertion (A): Banks mediate between those who have surplus funds and those who need funds.
Reason (R): Banks accept deposits from public and lend to borrowers.
Answer: (a) Both A and R are true and R is the correct explanation of A
Explanation: Banks act as financial intermediaries. They collect deposits (surplus funds) from savers and channel them as loans (needed funds) to borrowers, as described in R, which explains their mediating role.
Assertion (A): Poor households largely depend on informal sources of credit.
Reason (R): Formal sources require collateral which poor people cannot provide.
Answer: (a) Both A and R are true and R is the correct explanation of A
Explanation: Poor households lack assets for collateral and proper documentation needed by formal sources (R), forcing them to use expensive informal credit like moneylenders, as stated in A.
Assertion (A): Cheques and demand deposits are widely accepted as money.
Reason (R): They are backed by the guarantee of the Reserve Bank of India.
Answer: (a) Both A and R are true and R is the correct explanation of A
Explanation: Demand deposits (bank money) are accepted as money because they're convertible to cash and backed by RBI's guarantee (R), making them trustworthy mediums of exchange as stated in A.
Assertion (A): Credit can be useful as well as harmful.
Reason (R): Whether credit is useful or harmful depends on the risks in the situation and whether the borrower can repay.
Answer: (a) Both A and R are true and R is the correct explanation of A
Explanation: Credit helps when income increases (e.g., business loan) but creates debt traps when income falls (e.g., crop failure). R correctly explains this dual nature mentioned in A.
Assertion (A): Self-Help Groups help reduce dependence on informal lenders.
Reason (R): SHGs provide loans to members without collateral at reasonable interest rates.
Answer: (a) Both A and R are true and R is the correct explanation of A
Explanation: SHGs offer collateral-free loans at lower rates than moneylenders (R), providing an alternative that reduces dependence on expensive informal credit, as stated in A.
Assertion (A): Modern currency is without any use of its own.
Reason (R): It is accepted as money because it is authorized by the government of the country.
Answer: (a) Both A and R are true and R is the correct explanation of A
Explanation: Paper currency has no intrinsic value (A). It's accepted because the government declares it legal tender and people trust this guarantee (R), which explains why valueless paper becomes money.
Assertion (A): Banks create credit.
Reason (R): Banks use deposits to give loans, and these loans become new deposits in the banking system.
Answer: (a) Both A and R are true and R is the correct explanation of A
Explanation: Banks don't just lend existing money. When they give loans, the money enters circulation and gets deposited in banks again, creating new deposits - this credit creation process is explained in R.
Assertion (A): Farmers in India often fall into debt traps.
Reason (R): Crop failures due to natural calamities make it difficult for farmers to repay loans.
Answer: (a) Both A and R are true and R is the correct explanation of A
Explanation: Farmers borrow for cultivation but face risks like drought/floods (R). When crops fail, they can't repay and borrow more at high interest, falling into debt traps as stated in A.
Assertion (A): The RBI supervises the functioning of formal sources of credit.
Reason (R): RBI monitors banks to ensure they maintain minimum cash balance and don't lend to risky borrowers.
Answer: (a) Both A and R are true and R is the correct explanation of A
Explanation: As India's central bank, RBI regulates formal credit institutions. R describes specific supervisory functions (cash reserves, risk management) that explain how RBI supervises them as stated in A.

Case-Based Questions (1 Mark Each)

For questions 26 to 30, read the case/source carefully and answer.

Case: "In a village, Ramu needs a loan of ₹20,000 for his daughter's wedding. He approaches a bank but is refused due to lack of collateral. He then borrows from a moneylender at 5% monthly interest. When he cannot repay after 6 months, the moneylender takes his bullock cart as payment."
What problems in rural credit does this case highlight?

(a) Formal credit is easily accessible to all

(b) Informal credit often leads to debt trap and loss of assets

(c) Banks charge higher interest than moneylenders

(d) Wedding loans are always approved by banks

Answer: (b) Informal credit often leads to debt trap and loss of assets
Explanation: This shows how poor people, denied formal credit, turn to informal lenders who charge exorbitant rates. When unable to repay, they lose assets (collateral), creating a cycle of poverty and debt.
Case: Study the credit sources of rural households in India (approximate percentages):

Source Percentage

Moneylenders 30%

Relatives & Friends 20%

Commercial Banks 25%

Cooperatives 15%

Traders & Landlords 10%

What does this data reveal about rural credit in India?

(a) Formal sources dominate rural credit

(b) Informal sources still account for about 60% of rural credit

(c) All rural households use banks only

(d) Cooperatives are the main source of credit

Answer: (b) Informal sources still account for about 60% of rural credit
Explanation: Moneylenders (30%), relatives (20%), and traders (10%) together account for 60% of rural credit, showing continued heavy reliance on informal sources despite expansion of formal banking.
Case: "A Self-Help Group of 15 women saves ₹100 each per month. After 6 months, they have ₹9,000 (including interest). They lend to members for small businesses - one starts tailoring, another opens a small shop. All repay on time with interest, growing the fund."
What are the advantages of SHGs demonstrated here?

(a) Only for saving money, not for loans

(b) Provide collateral-free loans for income generation and build collective savings

(c) Charge higher interest than banks

(d) Benefit only urban women

Answer: (b) Provide collateral-free loans for income generation and build collective savings
Explanation: SHGs combine regular savings (building collective fund) with internal lending (for income activities) without requiring collateral. This empowers poor women financially and reduces dependency on moneylenders.
Case: "Rohan deposits ₹10,000 in a bank at 4% interest. The bank lends ₹8,500 to Meena for her business at 12% interest. Meena buys equipment from Raj, who deposits the payment in his bank account. The bank then lends a portion of Raj's deposit to another borrower."
What banking functions does this illustrate?

(a) Banks only keep deposits safe

(b) Banks mediate between savers and borrowers, create credit through lending

(c) Banks give away all deposits as loans

(d) Banks don't pay interest on deposits

Answer: (b) Banks mediate between savers and borrowers, create credit through lending
Explanation: This shows banks as financial intermediaries (taking Rohan's savings, lending to Meena) and credit creators (loans become new deposits when spent, enabling more lending), expanding money supply.
Case: "Two farmers take loans of ₹50,000 each. Farmer A uses it for digging a well, increasing crop yield and income. Farmer B uses it for his daughter's wedding. When crops fail due to drought, Farmer A repays from well-irrigated crops while Farmer B borrows more for daily needs, falling into debt."
What determines whether credit is productive or leads to debt trap?

(a) Amount of loan only

(b) Whether loan is used for income generation or consumption, and repayment capacity

(c) Interest rate only

(d) Lender's identity

Answer: (b) Whether loan is used for income generation or consumption, and repayment capacity
Explanation: Credit is productive when used for income-generating activities (well irrigation) that increase repayment capacity. It becomes problematic when used for consumption (wedding) without creating repayment sources, especially during crises.

Source	Percentage
Moneylenders	30%
Relatives & Friends	20%
Commercial Banks	25%
Cooperatives	15%
Traders & Landlords	10%

📘 Final Practice and Mastery Tips

Functions of money: Memorize all four functions with examples from daily life.

Compare credit sources: Create a table comparing formal vs informal sources on interest rates, collateral, documentation, etc.

Banking process: Understand how banks work - from deposits to lending to credit creation.

SHG mechanism: Learn how SHGs function and their role in women's empowerment and financial inclusion.

Real-world connections: Relate concepts to your experiences with banks, ATMs, digital payments, and local credit practices.

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