Question : Assertion (A) Currency held by the public is a monetary liability of the central bank.
Reason (R) Central bank controls credit, whereas commercial banks create credit with the currency held by the public.
Option 1: Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
Option 2: Both Assertion (A) and Reason (R) are true but Reason (R) is the not correct explanation of Assertion (A)
Option 3: Assertion (A) is true, but Reason (R) is false.
Option 4: Assertion (A) is false, but Reason (R) is true.
Correct Answer: Both Assertion (A) and Reason (R) are true but Reason (R) is the not correct explanation of Assertion (A)
Solution : The correct answer is (b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
Assertion is true because the central bank is responsible for issuing and maintaining the supply of currency, and it represents a liability on the central bank's balance sheet.
Reason states that the central bank controls credit, whereas commercial banks create credit with the currency held by the public. While the central bank does have a role in controlling credit through monetary policy tools, such as setting interest rates and reserve requirements, it is not directly linked to commercial banks creating credit with the currency held by the public. Commercial banks create credit through the process of fractional reserve banking, which involves lending out a portion of the deposits they receive, independent of the currency held by the public.
Therefore, both Assertion (A) and Reason (R) are true, but Reason (R) does not provide the correct explanation of Assertion (A).
