Social Science (087) — AI-generated practice question

When an informal lender charges a very high interest rate (e.g., 5% per month = 60% per annum), a large part of the borrower's earnings goes toward repaying interest, leaving little income for daily needs. To meet these expenses, the borrower must take fresh loans before the previous one is repaid. This creates a debt trap — the amount owed keeps growing beyond the borrower's income. As seen in Rama's case, the borrower becomes permanently tied to the lender, losing bargaining power and independence, making their situation worse off than before borrowing.

Source: Chapter 3 — Money and Credit, "Variety of Credit Arrangements" and "Formal Sector Credit in India"

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• Examiners expect three clear points for 3 marks: (1) high interest → less income left, (2) need for fresh loans → rising debt, (3) debt trap / permanent worsening.
• Use the textbook examples (Rama, Shyamal) to show you've read the chapter — this scores well.
• The key phrase examiners look for is "debt trap" — always use it.
• Do not write vaguely; state why it is worse off, not just that it is.