Money and credit


Social Science Flashcards on Money and credit, created by Meera Jayaraj on 01/22/2020.
Meera Jayaraj
Flashcards by Meera Jayaraj, updated more than 1 year ago
Meera Jayaraj
Created by Meera Jayaraj almost 3 years ago

Resource summary

Question Answer
Double coincidence of wants Both parties agree to sell and buy each other's commodities
Money 1. As the medium of the transaction - that is accepted in all transactions, by all parties, regardless of whether they desire each others' goods and services 2. Purchased or accepted as payment for goods and services for its ability to purchase other assets in the future without rapidly losing its purchasing power. 3. Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about how much of the good to supply and how much of the good to purchase.
Old forms of money Grains, cattle, gold, silver and copper coins - they had their own value
The modern form of money Currency, cheque, credit cards, debit cards have no value of its own It is accepted as a medium of exchange because the currency is authorized by the government of the country. It is issued by Reserve Bank of India
Cheque A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been issued.
Transfer of money from one bank to other A shoe manufacturer, M. Salim has to make a payment to the leather supplier and writes a cheque for a specific amount. This means that the shoe manufacturer instructs his bank to pay this amount to the leather supplier. The leather supplier takes this cheque, and deposits it in his own account in the bank. The money is transferred from one bank account to another bank account in a couple of days. The transaction is complete without any payment of cash.
Working of bank Depositors deposit money and get interest when they withdraw money. Bank holds 15% as cash of their deposits. The rest is given out as loans. When the borrower returns the amount, the interest along with it. This interest will be more than what the bank pays the depositors. This is the profit of the bank.
Credit 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.
Two credit situation Credit can play a positive or negative role. It can either help the borrower to manage ongoing expenses of production, complete production on time and thereby increase the earnings. Credit, on the other hand, can also push the borrower into a debt trap
Terms of Credit Interest rate, collateral and documentation requirement, and the mode of repayment is called the terms of credit.
Collateral Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.
Why do banks ask for collateral? 1. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment. 2. Bank take it as a guarantee as they do not keep personal relations with the borrower 3. Collateral will be a motivation for the borrower to return the loan on time.
Sources of credit
Functions of RBI 1. Reserve bank of India is the only agency authorized to issue the Indian currency. 2. The RBI monitors the banks in actually maintaining cash balance. 3. Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc. 4. It is the banker to the government 5. It is the bankers' bank - banks keep cash reserves in RBI and lend them if required 6. It controls the circulation of money in the country.
Cooperatives Members of a cooperative pool their resources for cooperation in certain areas. There are several types of cooperatives possible such as farmers cooperatives, weavers cooperatives, industrial workers cooperatives, etc.
Self Help Groups (SHG) 1. A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet and save regularly. 2. Saving per member varies from Rs 25 to Rs 100 or more 3. Members can take small loans from the group itself to meet their needs. 4. They will be charged with interest but it will be less than what charged by the moneylenders 5. After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank. 6. Not only does it help women to become financially self-reliant, but the regular meetings of the group also provide a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.
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