Banks and the Magic of FinanceClass 7 Social Science NCERT Solutions
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Q1Questions and activities
What is financial infrastructure? How does it complement physical infrastructure?
Solution
Financial infrastructure is the network of institutions, systems, and markets that facilitate financial transactions and the flow of money in an economy. According to the chapter, it comprises banks, payment systems, stock markets, and other financial institutions.
Financial infrastructure complements physical infrastructure in the following ways:
- Funding: The development and maintenance of large-scale physical infrastructure like roads, railways, and telecommunication networks require significant funding. Financial infrastructure, particularly banks and other financial institutions, provides the necessary loans and credit to the government and businesses to build and maintain these projects.
- Supporting Economic Activity: Physical infrastructure supports economic activities, but these activities are driven by money-related transactions. Financial infrastructure provides the systems (like banking and digital payments) that allow these transactions to occur smoothly. For example, it enables shopkeepers to pay salaries to workers, who can then use that money to buy essential items, keeping the economy moving.
Q2Questions and activities
How does having a bank account help people? Should everyone be required to have a bank account?
Solution
Having a bank account helps people in several important ways as mentioned in the chapter:
- Safety and Savings: It provides a safe place to keep money instead of holding cash at home. Banks also encourage saving by paying interest on deposits, which helps money grow over time through compounding.
- Access to Credit: A bank account makes it easier for individuals and businesses to get loans for various purposes, such as buying a house, funding education, or expanding a business.
- Convenient Transactions: It allows for easy and secure transactions, including withdrawing cash, making payments through cheques or debit cards, and receiving direct payments like salaries and scholarships.
- Financial Inclusion: As seen with the Pradhan Mantri Jan Dhan Yojana, bank accounts ensure that people, especially those with low incomes, are part of the formal financial system. This reduces reliance on middlemen and ensures timely disbursement of government benefits.
While the chapter highlights the immense benefits of bank accounts, whether everyone should be required to have one is a matter of policy. The success of the Jan Dhan Yojana, which aimed to give every Indian access to a bank account, suggests that universal access is highly beneficial for a nation's progress. It promotes financial inclusion, transparency, and empowers individuals by giving them control over their finances. Therefore, ensuring everyone has the opportunity and access to a bank account is a valuable goal.
Q3Questions and activities
What could be the possible advantages and disadvantages of compound interest for savers and borrowers?
Solution
Compound interest is the process of earning interest on the original principal amount as well as on the accumulated interest from previous periods. It has different effects on savers and borrowers.
For Savers:
- Advantage: The primary advantage for savers is that compound interest helps their money grow exponentially over time. As shown in the chapter with the example of receiving ₹1000, the interest earned increases each year because it is calculated on a larger base amount. This "magic of compounding" can turn small, regular savings into a large sum over a long period.
For Borrowers:
- Disadvantage: For borrowers, compound interest can be a significant disadvantage. When a person takes a loan, the interest they owe can also compound. This means they will have to pay interest not just on the initial loan amount but also on any interest that has been added to it. This can cause the total amount of debt to grow much faster, making the loan more expensive and harder to repay over time.
Q4Questions and activities
How does financial infrastructure enable the flow of money between households and businesses? Can you think of how the government can facilitate this flow?
Solution
Financial infrastructure creates a system for money to flow efficiently between households and businesses.
How the flow works:
- From Households to Businesses: Households deposit their savings into banks. Banks then act as intermediaries, lending this collective pool of money to businesses. Businesses use these loans as credit to fund their operations, such as buying new machinery or raw materials. Additionally, households can directly invest their savings in businesses by purchasing shares on the stock market.
- From Businesses to Households: Businesses pay wages and salaries to their employees (households). Financial infrastructure, through direct bank transfers, ensures this money flows securely and efficiently into the employees' bank accounts.
How the government can facilitate this flow:
- Regulation and Supervision: The government, through institutions like the Reserve Bank of India (RBI), supervises the banking system. It sets rules and regulations that ensure banks are stable and trustworthy, which encourages households to deposit their money.
- Promoting Financial Inclusion: The government can launch schemes like the Pradhan Mantri Jan Dhan Yojana, which aimed to provide every Indian with a bank account. This brings more households into the formal financial system, increasing the pool of savings that can be channelled to businesses.
- Developing Payment Systems: The government can support the development of efficient payment systems like UPI, which make transactions between households and businesses faster and more convenient.
Q5Questions and activities
What could be the reason for the higher interest rate earned on fixed deposits as compared to a savings account?
Solution
The reason for the higher interest rate on a fixed deposit (FD) account compared to a savings account lies in the commitment of time and the certainty it provides to the bank.
- Fixed Period: In a fixed deposit, the depositor agrees to keep their money in the bank for a fixed period, such as 3 or 5 years. They cannot withdraw this money before the period ends without a penalty. This gives the bank a guaranteed and stable source of funds for a known duration.
- Bank's Lending Ability: Because the bank is certain that the FD money will not be withdrawn unexpectedly, it can confidently lend this money out for longer-term loans, which typically carry higher interest rates for the borrower. The bank's ability to earn more from these long-term loans allows it to offer a higher interest rate to the FD holder as a reward.
- Flexibility of Savings Account: In contrast, money in a savings account can be withdrawn by the depositor with much fewer restrictions. This lack of certainty means the bank must keep more funds readily available and cannot commit them to long-term, higher-earning loans. Therefore, the interest rate offered on savings accounts is lower.
Q6Questions and activities
Sahil received ₹ 10,000 as a prize in a poster-making competition. His father promises to pay him 12 per cent interest per year if he does not spend the amount. After 3 years, how much money would Sahil have?
Solution
This problem can be solved by calculating the compound interest year by year, as shown in the chapter.
Principal Amount: ₹ 10,000
Interest Rate: 12% per year
End of Year 1:
- Interest earned = 12% of ₹ 10,000 = (12 / 100) × 10,000 = ₹ 1,200
- Total amount = ₹ 10,000 + ₹ 1,200 = ₹ 11,200
End of Year 2:
- The new principal for calculating interest is ₹ 11,200.
- Interest earned = 12% of ₹ 11,200 = (12 / 100) × 11,200 = ₹ 1,344
- Total amount = ₹ 11,200 + ₹ 1,344 = ₹ 12,544
End of Year 3:
- The new principal for calculating interest is ₹ 12,544.
- Interest earned = 12% of ₹ 12,544 = (12 / 100) × 12,544 = ₹ 1,505.28
- Total amount = ₹ 12,544 + ₹ 1,505.28 = ₹ 14,049.28
After 3 years, Sahil would have ₹ 14,049.28.
Q7Questions and activities
How does the stock market help mobilise the savings of individuals? In what ways do companies benefit by issuing shares to people?
Solution
The stock market plays a crucial role in connecting individuals' savings with the financial needs of companies.
How the stock market mobilises savings:
- The stock market provides a platform where individuals can invest their savings by buying shares of different companies. A share represents a part-ownership in a company. By purchasing shares, individuals channel their savings away from non-productive uses and into the economy. This act of investment allows them to participate in the growth of a company, with the expectation that the value of their shares will increase over time.
How companies benefit by issuing shares:
- The primary benefit for companies is raising funds. When a company wants to expand, launch new products, or invest in new technology but lacks sufficient money, it can issue shares to the public. People buy these shares, and the money they pay goes directly to the company. This provides the company with the necessary capital for its growth and operations without having to take on debt from a bank, which would require interest payments.
Q8Questions and activities
How can we balance the convenience of digital payments with the risk of cyber fraud?
Solution
Digital payments offer great convenience, but they come with the risk of fraud. We can balance these by adopting safe practices while using digital payment systems. The chapter suggests several ways to protect oneself:
- Protect Personal Information: Never share sensitive details like your bank account number, debit card details, PIN (Personal Identification Number), or OTP (One-Time Password) with anyone, even if they claim to be from a bank or a reputable company.
- Use Strong Passwords: Create unique and strong passwords for your banking apps and websites. Avoid using easily guessable information like your birthday or name.
- Be Cautious of Unsolicited Communication: Be wary of fake calls, SMS messages, or emails that create a sense of urgency and ask you to click on links, download apps, or share personal information. Fraudsters often use these tricks to gain access to your device and bank accounts.
- Verify Before Acting: Always double-check the identity of the person or company you are transacting with. Do not blindly trust requests for money or information.
- Report Immediately: In case you suspect any fraudulent activity, you must report it immediately to the national cybercrime helpline number 1930 or on the National Cybercrime Reporting Portal (cybercrime.gov.in). Quick reporting can help in blocking the transaction and recovering the money.
By being alert and following these safety measures, we can enjoy the convenience of digital payments while significantly reducing the risk of cyber fraud.
Q9Questions and activities
Ask your family members or neighbours about- → how they save money? → whether they use UPI, ATM or cheques, the kinds of transactions they perform through UPI; do they find UPI better than using cash or not, and why. → if they or their acquaintance have experienced digital fraud, for instance, through a fake call or message asking for bank details. What did they do when they realised it was a scam, and what did they learn from that experience? Summarise your findings in a table or short report. Share one surprising insight with your class.
Solution
This is an activity-based question. To complete it, you should interview your family members or neighbours and then present your findings. Here is a sample structure for your report.
Report on Financial Habits in My Neighbourhood
Introduction:
I interviewed [Number] people/families to understand their habits regarding saving money, payment methods, and experiences with digital fraud.
Findings:
You can present your findings in a table like this:
| Interviewee (e.g., Parent, Neighbour) | Savings Methods (e.g., Bank FD, Post Office, Cash at home) | Preferred Payment Method (UPI, Cash, Card, Cheque) | Reasons for Preference | Experience with Digital Fraud? | Actions Taken & Lessons Learned |
|---|---|---|---|---|---|
| Parent 1 | Bank Fixed Deposit, Savings Account | UPI | Fast, convenient, no need to carry cash | No | Always careful with OTPs |
| Neighbour | Post Office Schemes | Cash for small purchases, ATM for withdrawal | Finds cash simpler for daily needs | Yes (acquaintance) | They received a fake lottery message. They ignored it and blocked the number. Lesson: If it sounds too good to be true, it probably is. |
| Sibling | Savings Account | UPI | Easy to track spending on the app | No | Never clicks on unknown links |
Summary of Findings:
- Savings: Most people prefer to save their money in formal institutions like banks and post offices because it is safe and earns interest. Some still keep a small amount of cash at home for emergencies.
- Payments: UPI is very popular for its convenience and speed, especially among younger people. However, cash is still widely used for small, local transactions. Cheques are used less frequently, mostly for larger payments like rent or fees.
- Digital Fraud: While not everyone had a personal experience, most were aware of digital scams. The common lesson learned was to never share personal banking details like OTP or PIN and to be suspicious of unsolicited offers.
Surprising Insight:
One surprising insight was that my neighbour, despite having a smartphone, prefers using cash for most transactions because they feel it helps them control their spending better. They find that when they use UPI, they sometimes spend more than they intend to because the money transfer is so effortless.