Read the following statements - Assertion (A) and Reason (R) carefully and choose the correct alternative given below:
Assertion (A): Commercial banks create money by way of demand deposits.
Reason (R): M1 is the most commonly used measure of money supply.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Assertion (A) is true but Reason (R) is false
Assertion (A): Commercial banks create money by way of demand deposits. — True. When a bank lends, a new deposit opens in the borrower’s name. Money supply grows with these deposits.
Reason (R): M1 is the most commonly used measure of money supply. — False. M3 is the most commonly used measure. It is also called aggregate monetary resources.
NCERT (2026-27): “3.3 Money Creation by Banking System Banks can create money in a manner similar to that as given in Lala’s story. Banks can lend simply because they do not expect all the depositors to withdraw what they have deposited at the same time. When the banks lend to any person, a new deposit is opened in that person’s name. Thus money supply increases to old deposits plus new deposit (plus currency.) Let us take an example. …” “Legal Definitions: Narrow and Broad Money … M1 and M2 are known as narrow money. M3 and M4 are known as broad money. These measures are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all. M3 is the most commonly used measure of money supply. …” |