Test: Money and Banking- Assertion & Reason Type Questions- 1 - Commerce MCQ

M₁ is the most liquid measure of money supply as it includes all forms of assets that are easily exchangeable as payment for goods and services.

It includes coins and currency in circulation, demand deposits, traveler's checks, and other checkable deposits.

Legal tender money is that form of money that has a legal sanction by the government behind it. Checkable demand deposits are not legal tenders because a person can legally refuse to accept payment through checkable demand deposits.

• Money supply refers to the total stock of money of all types held by the people of a country at a given point of time.
• Money supply is measured in several ways including M1, M2, M3, and M4.
• Each measurement has its own definition with different components, varying from most liquid to most rigid form.
• M4 measurement of money supply is the least liquid money supply in India.
• M4 includes all other deposits of post office savings other than national savings certificates.
• M4 = M3 + Total deposits with post offices other than in the form of national saving certificates.
• In which, M3 = C + DD + OD + net time deposits with the commercial banks.
• C: Refers to currency held by the public in terms of coins and paper notes.
• DD: Refers to the demand deposits of the people with the commercial bank.
• OD: Includes other deposits with public financial institutions, foreign central banks, and international financial institutions.

• The Assertion (A) is true because money indeed acts as a unit of account, allowing individuals to assess the value of goods and services in a standardized manner.
• The Reason (R) is also true, as money simplifies exchanges by removing the complications of barter systems that require a double coincidence of wants.
• However, the Reason is not the correct explanation of the Assertion because the unit of account function of money does not directly relate to the facilitation of barter transactions; rather, it is a separate function of money.
• Therefore, the correct answer is Option B: both statements are true, but the reason does not explain the assertion.

- Assertion (A) is true because the banking system indeed facilitates money creation, which enhances economic activity and growth.

- Reason (R) is also true, as banks operate under a fractional reserve system, allowing them to lend a portion of deposits while keeping some in reserve.

- The reason provided correctly explains the assertion since the ability of banks to lend more than they hold in deposits directly contributes to their role in money creation and overall economic growth.

- Therefore, both the assertion and reason are true, with the reason being the correct explanation for the assertion.

- The Assertion is correct. The SLR is indeed a requirement for banks to maintain a portion of their deposits in liquid assets to ensure stability and solvency.

- The Reason is false. A higher SLR actually restricts the amount of money banks can lend since it mandates that a larger portion of their deposits be held as liquid assets rather than being available for lending.

- Therefore, the Reason does not correctly explain the Assertion, making Option C the correct choice.

- The Assertion is true because the Reserve Bank of India (RBI) is indeed responsible for regulating the money supply in the economy using various monetary policy tools.

- The Reason is also true as it accurately describes some of the key tools that the RBI employs to control the money supply, including changes in the CRR, open market operations, and adjustments to the bank rate.

- Furthermore, the Reason correctly explains the Assertion because these tools are essential mechanisms through which the RBI enacts its role in managing the money supply. Thus, the correct answer is Option A.

- Assertion: The assertion is correct; the Central Bank uses OMOs as a primary tool to regulate liquidity in the economy.

- Reason: The reason is also correct; OMOs indeed involve transactions of government securities to either increase or decrease the money supply.

- The reason correctly explains the assertion, as the process of buying and selling securities directly influences the liquidity in the economy, validating the assertion that OMOs are used for this purpose.

- Assertion: The assertion is correct. When people expect interest rates to fall, they anticipate that bond prices will increase, leading to capital gains. This expectation drives them to hold onto money instead of bonds, thereby increasing speculative demand for money.

- Reason: The reason is also correct. It accurately reflects the behavior of investors who opt to hold money to avoid potential losses from rising interest rates, which would lead to falling bond prices.

- Since both the assertion and reason are true, and the reason explains the assertion, Option A is the correct choice.

- The Assertion is correct because the introduction of new currency notes was part of the demonetisation strategy to curb black money and increase transparency in financial transactions.

- The Reason is also correct, as the cash shortage did encourage a shift towards digital payments, which aligns with the goal of making the economy more transparent.

- Furthermore, the Reason provides a valid explanation for the Assertion, as both actions were part of the broader objective to enhance the formal economy and reduce cash dependency. Thus, both statements are true, and the Reason correctly explains the Assertion.