SEBA Class 9 Economics: Basic Economic Problems

PART-1

EXERCISE QUESTION

VERY SHORT ANSWER TYPE QUESTIONS

1. What is money?

Answer: Money is anything that is generally accepted as a means of exchange and also serves as a measure and a store of value.

2. Give an example of non-legal tender money.

Answer: An example of non-legal tender money is cheque money.

3. Whose definition of money is the most acceptable?

Answer: The definition of money given by Professor Crowther is the most acceptable.

4. What is the fifth stage in the evolution of money?

Answer: The fifth stage in the evolution of money is paper money.

5. Give two examples of UPI payment app.

Answer: Two examples of UPI payment apps are Google Pay and PhonePe.

6. What is the standard money in India?

Answer: The standard money in India is the Rupee.

7. The refusal of which type of money will be violation of law?

Answer: The refusal of legal tender money will be a violation of law.

SHORT ANSWER TYPE QUESTIONS

1. What are the characteristics of money?

Answer: Money has two important characteristics:

1. Money is defined in terms of the functions it performs. In other words, money is the thing that serves as money.

2. The essential characteristic of money is its general acceptability. It must be generally accepted as a means of exchange.

2. How does the lack of double coincidence of wants create problems in the barter system?

Answer: The lack of double coincidence of wants creates a problem because, in the barter system, both persons involved in the exchange must want each other’s goods at the same time. For example, if Papu has a goat and wants a chicken, but the person who has the chicken wants corn instead of a goat, the exchange cannot take place. Thus, the lack of double coincidence of wants makes exchange difficult in the barter system.

3. What is money-of-account and money proper?

Answer: Money-of-account is merely a concept or an abstract idea. It does not undergo any change. Money proper is the actual form of money, which changes from time to time. Commodity money, animal money, metallic money and paper money were money proper at different points of time.

4. What is meant by store of value?

Answer: Money acts as a store of value when the value of goods and services can be stored in the form of money. Money can be easily converted into goods and services whenever they are needed.

5. Why is money the common unit of measurement of the value of goods and services?

Answer: Money is the common unit of measurement because the value of all economic goods and services is expressed in terms of money.

6. What is the difference between limited and unlimited legal tender?

Answer: Limited legal tender can be used as a medium of exchange only up to a given value of a transaction. Unlimited legal tender can be used as a medium of exchange for transactions of any value.

7. What is plastic money and digital money?

Answer: Plastic money refers to payment methods made through credit and debit cards, which are predominantly made of plastic with metallic components. Digital money is any means of payment that is entirely electronic and is not physically tangible like notes or coins.

LONG ANSWER TYPE QUESTIONS

1. Explain the types of money.

Answer: Money can be broadly classified into money-of-account and money proper. Money proper has different types, as follows:

1. Commodity money

2. Animal money

3. Metallic money

4. Paper money

5. Legal tender money

6. Non-legal tender money

7. Fiat money

8. Token money

9. Cheque money

10.Standard money

11.Hot money

12.Dear money

13.Easy money

14.Black money

15.High-powered money

16.Plastic money

17.Digital money

2. Is cheque money? Give reasons for your answer.

Answer: Yes, cheque is considered money because it is an example of non-legal tender money. Its general acceptability as a medium of exchange has no legal support, and refusing to accept it does not violate the law.

3. What are the stages in the evolution of money?

Answer: The evolution of money took place through the following stages:

1. Barter System: In the barter system, commodities were directly exchanged for other commodities. It faced problems such as lack of double coincidence of wants, portability and divisibility.

2. Animal Standard: In this stage, animals, particularly goats, were used as a medium of exchange. However, animals were not homogeneous, could die during epidemics and were indivisible.

3. Metallic Standard: Gold and silver were used as money because they were valuable and acceptable as a medium of exchange. However, it was difficult to check whether the metals were genuine and unsafe to carry from one place to another.

4. Coinage: Gold and silver bars were made into coins. However, the supply of metals was inelastic, and carrying large amounts of coins became inconvenient as trade expanded.

5. Paper Money: Paper money replaced coinage because of these difficulties. Initially, paper money could be converted into gold or silver of equivalent value. Later, paper money itself came to be accepted as money and was no longer a claim against gold or silver.

6. Digital Money: Digital money is a means of payment that is entirely electronic. It is not physically tangible like notes or coins, and its accounting and transfer are done through an online system.

These stages show how money developed from the direct exchange of commodities to modern digital forms of payment.

4. ‘Financial transactions have undergone a major shift from Cash Payment to Digital Payment.’- Explain.

Answer: Financial transactions have undergone a major shift from cash payment to digital payment due to the development of technology. Today, most payments are made through online modes such as card payments, transfers through apps and UPI (Unified Payment Interface). Cash payments are simple and widely accepted, especially for small payments. On the other hand, digital payments are mostly safe, secure and fast, and are advisable for payments involving larger amounts. UPI is the most widely used Indian payment system and includes apps such as Google Pay, PhonePe, BHIM, Paytm, Amazon Pay and CRED.

5. What are the functions of money?

Answer: Money performs four main functions:

1. Medium of exchange: Money acts as a medium of exchange. Commodities are indirectly exchanged through money. For example, a person can sell rice for money and use that money to buy cloth.

2. Standard of measurement of value: Money acts as a common unit for measuring the value of goods and services. The value in exchange expressed in terms of money is called price.

3. Standard of deferred payments: Money acts as a standard for payments made later. Loans and other deferred payments are expressed and maintained in terms of money.

4. Store of value: Money acts as a store of value because the value of goods and services can be stored in the form of money and converted into goods and services whenever required.

The first two are called the primary functions of money, while the last two are called the secondary functions.

6. State the role of money in an economy.

Answer: Money plays an important role in an economy in the following ways:

1. Money makes exchange easier by removing the difficulties of the barter system.

2. The price system depends on the supply of money. In a market-centred economy, demand and supply forces determine the output and prices of commodities and services.

3. Even when the government determines the price and output of commodities and services, the value of output is expressed in terms of money. Thus, without money, no economic system can operate.

PART-2

SHORT ANSWER TYPE QUESTIONS

1. What is the importance of financial literacy?

Answer: Financial literacy is important because it helps an individual make wise financial decisions and manage money properly. Its importance can be explained in three main points:

1. Financial decision-making and well-being: Financial literacy develops financial decision-making skills and improves the ability to manage money. It helps individuals manage their personal finances, meet present financial obligations and secure their future financial condition.

2. Prevention of financial mistakes and emergencies: Financial literacy helps people avoid wrong financial decisions caused by a lack of knowledge about financial facts and products. It also prepares individuals to face unexpected financial emergencies such as medical expenses, home-related expenses and unemployment.

3. Achievement of financial goals and better money management: Financial literacy helps individuals set financial goals and achieve them through proper financial planning. It also helps them understand how to spend money wisely and the importance of saving and investing.

2. Why is savings important for an individual?

Answer: Savings are important for an individual for the following reasons:

1. Future needs and investments: Savings can be used for future investments and income. It provides financial support for planned future needs.

2. Financial emergencies: Savings can be used to meet unforeseen financial emergencies that may arise at any time in an individual’s life.

3. Safe and accessible money: Savings kept in a bank savings account earn a nominal interest, have low or negligible risk and can be withdrawn easily whenever required.

3. What are the types of expenses?

Answer: There are two types of expenses:

1. Recurring expenses: These are expenses that need to be paid repeatedly after a period of time. They are repetitive in nature and can usually be planned in advance. For example, house rent and electricity expenses.

2. Non-recurring expenses: These are expenses that arise suddenly and are not repetitive in nature. Therefore, they are difficult to plan in advance. For example, the sudden breakdown of a car, fridge or washing machine.

4. Why should financial goals be achievable? Give an example.

Answer: Financial goals should be achievable because they should be reasonable and within the income of an individual. A person should set goals that can realistically be completed with the available income.

For example, if a person earns ₹25,000 per month, setting a goal of saving ₹50,000 in just two months is not achievable. Instead, the person can set a goal of saving ₹50,000 in the next 10 months by saving ₹5,000 each month.

5. What are the sources from which a person can earn income?

Answer: A person can earn income from different sources such as salary, rent, interest and profit.

· Salary is the monetary benefit received by an employee from an employer for the services rendered.

· Rent is the income earned by letting out house property.

· Interest is the amount earned from holding money in a savings bank account or investing in investment instruments.

· Profit is the financial gain from engaging in a business.

6. What is financial planning?

Answer: Financial planning is the process of estimating the financial needs of a person. Then a comprehensive plan is prepared and implemented to meet those financial needs, such as education, purchasing a house, marriage and meeting emergency situations.

7. Where should savings amount be kept and why?

Answer: Savings should be kept in a savings account in a bank or post office. Keeping savings at home is risky, and the money kept at home does not earn any interest. A savings account is safer, and the amount also earns some interest.

LONG ANSWER TYPE QUESTIONS

1. What are the goals of financial planning?

Answer: Financial planning is done by an individual to achieve specific goals that require financial obligations. These goals are classified into three types based on time and risk:

1. Short-term financial goals: These are goals that an individual wants to achieve within one year. For example, purchasing a mobile phone or celebrating a birthday. These goals usually have low risk.

2. Medium-term financial goals: These are goals that an individual wants to achieve from one year up to five years. For example, purchasing a car or starting a small business. These goals usually have moderate risk.

3. Long-term financial goals: These are goals that an individual wants to achieve beyond five years. For example, purchasing a house or retirement planning. These goals usually have high risk.

2. Explain the importance of investment.

Answer: Investment is important because it helps an individual grow money and meet future financial needs. Its importance can be explained as follows:

1. Higher returns: Investment generally earns a better return compared to the nominal interest earned on money kept in a savings account.

2. Protection against inflation: Inflation reduces the purchasing power of money. Suitable investments can help minimize this effect and can help multiply money.

3. Achievement of financial goals: Investment helps an individual meet important life goals such as building a house, children’s education, marriage and family vacations.

3. What precautions should a person take against financial fraud?

Answer: A person should take the following precautions to avoid becoming a victim of financial fraud:

1. Never share ATM card details, PIN, Aadhaar number, PAN number or passwords with anyone, even if they claim to be bank employees. Also, never click on links received through messages or emails asking for bank account details.

2. Do not believe investment schemes that promise very high returns or interest within a very short period. Also, never provide a UPI password while receiving money from others, as the UPI password is required only while making payments.

3. Always follow the guidelines of the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). Do not trust advice from unscrupulous financial advisers through messages, email or social media. Also, avoid getting involved in online gaming or gambling platforms.

4. Explain the principles that can guide an individual in taking investment decisions?

Answer: The following principles can guide an individual in taking investment decisions:

1. Safety: The amount of money invested and the returns earned from it should be protected. At the end of the agreed period, the investor should get back the entire amount.

2. Liquidity: It refers to how quickly the investor can get back the invested money when it is needed. It means converting the investment into cash easily.

3. Return: Return refers to the earnings from an investment in the form of interest or appreciation in value. For example, interest is earned from a fixed deposit.

4. Risk: Risk refers to the uncertainty associated with an investment. An investment may sometimes result in a loss, depending on its value in the future.

5. What are the steps of financial planning?

Answer: The steps of financial planning are:

1. Determine current financial position: Before making plans for the future, an individual should understand their current financial position. This includes knowing their income, expenses, assets and liabilities.

2. Identify and set financial goals: The individual should identify their financial goals and set a time frame for achieving them. These goals may be short-term, medium-term or long-term.

3. Identify suitable investment avenues: The individual should understand different investment options based on safety, liquidity, return, risk and the time period of investment. Then, a suitable investment option should be selected.

4. Implement the financial plan: A comprehensive plan including financial goals, budget, saving and investment avenues should be prepared and put into action. Expenses should also be tracked with the help of a budget.

5. Review financial plan: The financial plan should be reviewed and revised regularly because financial goals and circumstances may change. Necessary modifications should be made to keep the plan relevant.

6. How can an individual be prepared for financial emergencies?

Answer: An individual can be prepared for financial emergencies by developing financial literacy and making proper financial plans. The following measures can help:

1. Save money regularly: Savings can be used to meet unforeseen financial emergencies that may arise at any time.

2. Plan for unexpected expenses: Financial planning should consider emergency situations such as illness, accidents, death or natural calamities like floods. This helps an individual estimate and prepare for such financial needs.

3. Manage money wisely: Financial literacy helps an individual understand how to spend, save and invest money properly, which helps in preparing for uncertain financial situations.

7. Explain how to set SMART goals.

Answer: SMART goals provide a framework for setting clear and practical financial goals. SMART stands for Specific, Measurable, Achievable, Realistic and Time-bound.

1. Specific: Financial goals should be clear and well-defined. An individual should know exactly what they want to achieve and when. For example, instead of saying “I should keep aside some money for my sister’s birthday,” one should decide to keep ₹1,000 aside for her birthday next month.

2. Measurable: Financial goals should have specific criteria to measure progress. For example, instead of saying “I will return ₹1,000 borrowed from my friend as soon as possible,” one can save ₹500 each month and return the amount within two months.

3. Achievable: Financial goals should be reasonable and within the income of the individual. For example, a person earning ₹25,000 per month should not aim to save ₹50,000 in two months. Instead, the person can aim to save ₹50,000 in 10 months by saving ₹5,000 each month.

4. Realistic: Financial goals should be realistic, within reach and relevant to the individual’s life purpose. For example, investing ₹5,000 each month for one year should not be expected to make a person a millionaire the following year.

5. Time-bound: Financial goals should have a clear time period or target date. For example, a person can set a goal of saving ₹30,000 each year for 10 years for their daughter’s marriage.