Class 10 Social Science Economics Chapter 1 — Money and Banking System
Welcome to HSLC Guru! This study guide covers Class 10 Social Science Economics Chapter 1 — Money and Banking System for the Assam State School Education Board (ASSEB). You will find a clear summary, complete textbook question-answers, additional MCQs, fill-in-the-blanks, true/false practice, and a glossary — all written in simple English to help you score full marks in your HSLC examination.
Chapter Summary
Before money was invented, people exchanged goods directly for other goods. This system was called the barter system. Although barter worked in small village societies, it suffered from serious limitations as economic life grew more complex. The biggest problem was the double coincidence of wants — both parties had to want exactly what the other was offering at the same time. There was no common measure of value, so people could not easily decide how much rice equalled one cow. Many goods (like cattle or land) were indivisible and could not be split for small purchases. Goods like grain or milk could not be stored for long, so barter offered no good store of value and no way to make payments in the future.
To overcome these difficulties, society invented money. Money is anything that is generally accepted as a medium of exchange and a measure of value. It performs four main functions: (i) medium of exchange — it is accepted in payment for goods and services; (ii) unit of account / measure of value — prices of all goods are expressed in money; (iii) store of value — wealth can be saved in the form of money; and (iv) standard of deferred payment — future payments such as loans, rent and salaries are fixed in money terms. Over time money has taken several forms — metallic money (gold, silver, copper coins), paper / fiat money (currency notes issued by the central bank), plastic money (debit and credit cards) and digital money (UPI, net banking, mobile wallets). On 8 November 2016, the Government of India announced demonetisation, withdrawing the legal tender status of ₹500 and ₹1000 notes to curb black money, fake currency and to push the country towards a digital economy.
A bank is a financial institution that accepts deposits from the public and lends money to those who need it. The activity carried on by banks is called banking. The Indian banking system has several types of banks: the Reserve Bank of India (RBI) — the central bank established on 1 April 1935 and nationalised in 1949; commercial banks (public sector like SBI, private sector like HDFC, and foreign banks); cooperative banks serving farmers and small traders; regional rural banks (RRBs) serving rural areas; and development banks like NABARD, SIDBI and IDBI which provide long-term industrial and agricultural finance. Commercial banks perform two primary functions — accepting deposits and advancing loans — along with secondary functions such as credit creation and agency functions (paying bills, collecting cheques, transferring funds, locker facility, foreign exchange).
Banks accept four main types of deposits: savings deposits (small savings with limited withdrawals and modest interest), current deposits (used by businessmen with no interest but unlimited transactions), fixed / term deposits (money kept for a fixed period at high interest) and recurring deposits (a fixed amount deposited every month). Banks also issue cheques, demand drafts and offer different types of loans — cash credit, overdraft, term loans and discounting of bills. The RBI performs many vital functions — issuing currency notes (except ₹1 note and coins which are issued by the Government of India), acting as banker to the government, banker’s bank, custodian of foreign exchange reserves, lender of last resort, and controller of credit through tools like CRR (Cash Reserve Ratio), SLR (Statutory Liquidity Ratio), repo rate, reverse repo rate and bank rate. A sound banking system mobilises savings, provides credit to farmers, industrialists and entrepreneurs, supports government schemes like Jan Dhan Yojana, and is therefore the backbone of India’s economic development.
Textbook Questions and Answers
A. Very Short Answer Questions (1 Mark)
Q1. What is the barter system?
Answer: The barter system is the direct exchange of goods or services for other goods or services without the use of money.
Q2. Define money.
Answer: Money is anything that is generally accepted as a medium of exchange, a measure of value and a store of value.
Q3. When was demonetisation announced in India?
Answer: Demonetisation was announced on 8 November 2016, withdrawing the legal tender of ₹500 and ₹1000 notes.
Q4. What is the full form of RBI? When was it established?
Answer: RBI stands for Reserve Bank of India. It was established on 1 April 1935.
Q5. What is fiat money?
Answer: Fiat money is paper currency issued by the government or central bank that has value because the government declares it as legal tender, even though it has no intrinsic value.
Q6. Name any two types of bank deposits.
Answer: (i) Savings deposit and (ii) Fixed / Term deposit.
Q7. What is CRR?
Answer: CRR (Cash Reserve Ratio) is the minimum percentage of total deposits that commercial banks must keep with the RBI as cash reserves.
Q8. What is plastic money?
Answer: Plastic money refers to debit cards, credit cards and ATM cards that are used in place of cash for making payments.
Q9. Who is the present Governor of the Reserve Bank of India?
Answer: The Governor of the RBI is the head of the central bank of India (currently Shri Sanjay Malhotra, appointed in December 2024).
Q10. What is a cheque?
Answer: A cheque is a written order from a depositor instructing the bank to pay a specific amount of money to a named person or to the bearer.
B. Short Answer Questions (2–3 Marks)
Q1. Mention any three limitations of the barter system.
Answer: The main limitations of the barter system are:
- Lack of double coincidence of wants: Both parties must want each other’s goods at the same time, which rarely happens.
- Lack of a common measure of value: There was no standard unit to measure the value of different goods.
- Indivisibility of goods: Many goods like cattle could not be divided into small parts for exchange.
- Lack of store of value: Most barter goods (like grain, milk) could not be stored for long periods.
Q2. Explain the four main functions of money.
Answer: Money performs four primary functions:
- Medium of exchange: Money is accepted as payment for goods and services, removing the problem of double coincidence of wants.
- Unit of account / measure of value: The value of all goods and services is expressed in money terms (price).
- Store of value: People can save money for future use because it does not lose value quickly.
- Standard of deferred payment: Future payments such as loans, rents and salaries are stated in money.
Q3. Distinguish between savings deposit and current deposit.
Answer:
| Basis | Savings Deposit | Current Deposit |
|---|---|---|
| Holder | Common people / salaried persons | Businessmen / firms |
| Interest | Low rate of interest paid | No interest paid |
| Withdrawals | Limited number per month | Unlimited withdrawals |
| Purpose | To encourage saving habit | For day-to-day business transactions |
Q4. What is meant by demonetisation? When and why was it done in India?
Answer: Demonetisation is the act of withdrawing the legal tender status of certain currency notes. On 8 November 2016, the Government of India demonetised ₹500 and ₹1000 notes. The main aims were to curb black money, eliminate fake currency, stop the financing of terrorism, and push the economy towards cashless / digital transactions.
Q5. Write a short note on regional rural banks (RRBs).
Answer: Regional Rural Banks were set up in 1975 on the recommendation of the Narasimham Committee. Their main objective is to provide credit and banking services to small and marginal farmers, agricultural labourers, artisans and small traders in rural areas. The capital of an RRB is shared by the Central Government, State Government and a sponsor bank in the ratio 50:15:35.
Q6. Explain repo rate and reverse repo rate.
Answer: Repo rate is the rate of interest at which the RBI lends short-term funds to commercial banks against government securities. Reverse repo rate is the rate at which the RBI borrows money from commercial banks. When the RBI raises the repo rate, loans become costly and money supply decreases.
Q7. Distinguish between a cheque and a demand draft.
Answer:
| Basis | Cheque | Demand Draft (DD) |
|---|---|---|
| Issued by | Account holder of the bank | The bank itself |
| Payment | May bounce if balance is insufficient | Always honoured (prepaid) |
| Charges | Free for account holders | Bank charges a small commission |
| Use | Local payments | Outstation / safe payments |
Q8. Mention any three differences between metallic money and paper money.
Answer: (i) Metallic money is made of metals like gold, silver and copper, while paper money is printed on paper. (ii) Metallic money has high intrinsic value but paper money has only face value. (iii) Metallic money is heavy and inconvenient for large payments; paper money is light, easy to carry and easy to count.
Q9. Distinguish between a central bank and a commercial bank.
Answer:
| Basis | Central Bank (RBI) | Commercial Bank |
|---|---|---|
| Number | Only one in a country | Many in number |
| Aim | Public welfare and regulation | Profit-making |
| Currency Issue | Has the sole right to issue notes | Cannot issue currency |
| Customers | Government and other banks | General public and businesses |
| Control | Controls the entire banking system | Is controlled by the central bank |
Q10. What are the main objectives of demonetisation?
Answer: The main objectives of the 2016 demonetisation in India were:
- To curb the circulation of black money hoarded as cash.
- To eliminate fake currency notes printed by anti-national elements.
- To stop terror financing through illegal cash.
- To promote a cashless and digital economy.
- To widen the tax base by bringing more transactions into the formal banking system.
C. Long Answer Questions (5–6 Marks)
Q1. Discuss the various types of money used in modern times.
Answer: In modern economies money has taken many forms:
- Metallic money: Coins made of gold, silver, copper, nickel etc. In India, coins of ₹1, ₹2, ₹5, ₹10 and ₹20 are in circulation.
- Paper / Fiat money: Currency notes issued by the RBI (₹2, ₹5, ₹10, ₹20, ₹50, ₹100, ₹200, ₹500, ₹2000). They are accepted because the government declares them legal tender.
- Bank money / Credit money: Cheques, demand drafts and bills of exchange used to transfer money through banks.
- Plastic money: Debit cards, credit cards and ATM cards used to make payments without carrying cash.
- Digital / Electronic money: UPI, net banking, mobile wallets (Paytm, PhonePe, Google Pay) and BHIM that allow instant transfer of funds through the internet.
Q2. Explain the main functions of commercial banks.
Answer: Commercial banks perform the following functions:
- Accepting deposits: Banks accept savings, current, fixed and recurring deposits from the public.
- Advancing loans: Banks provide loans and advances such as cash credit, overdraft, term loans and discounting of bills.
- Credit creation: By keeping only a fraction as cash reserve and lending the rest, banks create credit money several times the original deposit.
- Agency functions: Collection and payment of cheques, bills, dividends and rents on behalf of customers; transfer of funds; purchase and sale of shares.
- General utility services: Locker facility, foreign exchange dealings, traveller’s cheques, ATM and online banking.
Q3. Describe the main functions of the Reserve Bank of India.
Answer: The RBI is the central bank of India and performs these key functions:
- Issue of currency notes: The RBI has the sole authority to issue all currency notes in India except the ₹1 note and coins (issued by the Government of India).
- Banker to the Government: It manages receipts, payments and public debt of the central and state governments.
- Banker’s bank: All commercial banks keep a part of their reserves with the RBI and can borrow from it in times of need.
- Custodian of foreign exchange reserves: The RBI maintains India’s foreign exchange and gold reserves and stabilises the value of the rupee.
- Lender of last resort: When commercial banks face a financial crisis, the RBI lends them money against approved securities.
- Controller of credit: Through tools like CRR, SLR, repo rate, reverse repo rate, bank rate and open market operations, the RBI controls the supply of money and credit in the country.
Q4. Explain the importance of banking in the economic development of India.
Answer: Banks play a crucial role in India’s economic development:
- Mobilisation of savings: Banks collect small savings from the public and convert them into productive capital.
- Capital formation: The deposits collected are channelised into investment in industry, agriculture and infrastructure.
- Credit to priority sectors: Banks give loans to farmers, small businesses, women entrepreneurs and weaker sections at concessional rates.
- Promotion of trade and industry: Industrial finance, export-import credit and working capital loans support business activity.
- Implementation of government schemes: Banks help in running schemes like Pradhan Mantri Jan Dhan Yojana, MUDRA, Kisan Credit Card, etc.
- Encouraging digital economy: UPI, net banking and ATMs have made transactions fast, safe and inclusive.
- Balanced regional growth: Rural and cooperative banks provide credit to backward areas, reducing regional disparities.
Q5. What is meant by credit creation by commercial banks? Explain with a simple example.
Answer: Credit creation means the ability of commercial banks to create money in the form of demand deposits that is several times more than the cash they actually hold. Banks know that all depositors will not withdraw their money at the same time, so they keep only a small fraction as cash reserve (CRR) and lend the rest. The borrowed money again comes back to the banking system as a new deposit, which can again be lent. This process continues until the original deposit multiplies. Example: If CRR is 10% and the initial deposit is ₹1,000, the bank keeps ₹100 as reserve and lends ₹900. The ₹900 is re-deposited; the bank keeps ₹90 and lends ₹810, and so on. Total credit created = ₹1,000 ÷ 0.10 = ₹10,000.
Q6. Explain the limitations of the barter system in detail.
Answer: The barter system was useful in primitive societies but became unsuitable as economic life expanded. Its main limitations were:
- Lack of double coincidence of wants: If a farmer with rice wanted cloth, he had to find a weaver who needed rice at the same time. This rarely happened and trade became slow and difficult.
- Lack of common measure of value: There was no fixed unit to express the value of different goods. People had no way to know how many kilograms of rice equalled one cow.
- Indivisibility of goods: Many goods such as cattle, horses, ornaments and houses could not be divided into smaller parts for buying things of low value.
- Difficulty in storing wealth: Goods like grain, fish, milk and vegetables get spoilt quickly and cannot be saved for future use.
- Difficulty in deferred payments: Future payments such as loans, salaries and rents could not be fixed because the value of barter goods kept changing.
- Lack of transferability: Heavy and bulky goods were difficult to carry from one place to another.
To overcome all these problems, society invented money — which acts as a medium of exchange, store of value and standard of deferred payment.
Additional Practice Questions
I. Multiple Choice Questions (MCQ)
Q1. The biggest drawback of the barter system was —
(a) Lack of money (b) Double coincidence of wants (c) High prices (d) Too many banks
Answer: (b) Double coincidence of wants.
Q2. Which of the following is NOT a function of money?
(a) Medium of exchange (b) Store of value (c) Unit of account (d) Production of goods
Answer: (d) Production of goods.
Q3. Demonetisation in India was announced on —
(a) 8 November 2014 (b) 8 November 2015 (c) 8 November 2016 (d) 1 April 2017
Answer: (c) 8 November 2016.
Q4. The Reserve Bank of India was nationalised in —
(a) 1935 (b) 1947 (c) 1949 (d) 1969
Answer: (c) 1949.
Q5. Which one of the following is plastic money?
(a) Currency note (b) Coin (c) Credit card (d) Cheque
Answer: (c) Credit card.
Q6. The lender of last resort in India is —
(a) SBI (b) HDFC (c) RBI (d) NABARD
Answer: (c) RBI.
Q7. CRR stands for —
(a) Central Reserve Ratio (b) Cash Reserve Ratio (c) Currency Reserve Rate (d) Credit Reserve Ratio
Answer: (b) Cash Reserve Ratio.
Q8. Which deposit account earns the highest rate of interest?
(a) Current (b) Savings (c) Recurring (d) Fixed / Term
Answer: (d) Fixed / Term deposit.
Q9. NABARD is a type of —
(a) Commercial bank (b) Cooperative bank (c) Development bank (d) Foreign bank
Answer: (c) Development bank.
Q10. The full form of UPI is —
(a) Unique Payment Interface (b) Unified Payment Interface (c) United Payment Internet (d) Uniform Personal Identity
Answer: (b) Unified Payment Interface.
Q11. Which of the following is NOT a function of the RBI?
(a) Issue of currency (b) Banker to government (c) Selling shares to public (d) Lender of last resort
Answer: (c) Selling shares to public.
Q12. The headquarters of the Reserve Bank of India is located in —
(a) New Delhi (b) Kolkata (c) Mumbai (d) Chennai
Answer: (c) Mumbai.
Q13. Money kept in a bank for a fixed period at higher interest is called —
(a) Current deposit (b) Savings deposit (c) Recurring deposit (d) Fixed deposit
Answer: (d) Fixed deposit.
II. Fill in the Blanks
Q1. The direct exchange of goods for goods is called the __________ system.
Answer: barter
Q2. The Reserve Bank of India was established on __________ .
Answer: 1 April 1935
Q3. __________ is known as the banker’s bank in India.
Answer: RBI
Q4. The minimum percentage of deposits commercial banks must keep with the RBI is called __________ .
Answer: Cash Reserve Ratio (CRR)
Q5. Money that is generally accepted only because the government declares it legal tender is called __________ money.
Answer: fiat / paper
Q6. SLR stands for __________ .
Answer: Statutory Liquidity Ratio
Q7. The headquarters of the RBI is in __________ .
Answer: Mumbai
III. True / False
Q1. The barter system has no problem of double coincidence of wants. — False
Q2. Money serves as a standard of deferred payment. — True
Q3. Current deposits earn the highest rate of interest. — False
Q4. The RBI controls credit through repo rate and CRR. — True
Q5. Demonetisation was announced on 8 November 2016. — True
Glossary of Important Terms
| Term | Meaning |
|---|---|
| Barter System | Direct exchange of goods for goods without using money. |
| Money | Anything generally accepted as a medium of exchange and measure of value. |
| Fiat Money | Paper currency that has value because the government declares it legal tender. |
| Plastic Money | Debit and credit cards used in place of cash. |
| Digital Money | Money transferred electronically through UPI, mobile wallets, net banking. |
| Demonetisation | Withdrawal of legal tender status of currency notes (India: 8 Nov 2016). |
| Bank | An institution that accepts deposits and gives loans. |
| RBI | Reserve Bank of India — the central bank of India (estd. 1 April 1935). |
| Commercial Bank | A bank that accepts deposits and lends money for profit (e.g. SBI, HDFC). |
| Cooperative Bank | A bank set up on cooperative principles to serve farmers and small traders. |
| RRB | Regional Rural Bank — provides credit in rural areas. |
| Development Bank | Bank that provides long-term finance for industry / agriculture (NABARD, SIDBI). |
| Savings Deposit | Account for small savings with limited withdrawals and modest interest. |
| Current Deposit | Business account with unlimited withdrawals but no interest. |
| Fixed Deposit | Money deposited for a fixed period at a higher rate of interest. |
| Recurring Deposit | Account in which a fixed sum is deposited every month. |
| Cheque | Written order to a bank to pay a specific sum to a named person. |
| Demand Draft | Bank-issued instrument to transfer money from one place to another. |
| Credit Creation | Process by which banks create deposits several times the original cash reserve. |
| CRR | Cash Reserve Ratio — % of deposits banks keep with RBI. |
| SLR | Statutory Liquidity Ratio — % of deposits banks keep in liquid assets. |
| Repo Rate | Rate at which RBI lends short-term funds to commercial banks. |
| Reverse Repo Rate | Rate at which RBI borrows from commercial banks. |
| Bank Rate | Long-term lending rate of the RBI to commercial banks. |
| Lender of Last Resort | RBI’s role of lending to banks during financial crisis. |
| UPI | Unified Payment Interface — instant digital fund transfer system. |
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