Question

Assertion (A): Money provides the basis for credit creation.

Reason (R): Credit creation by commercial banks is not possible without money.

Options

• Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

• Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).

• Assertion (A) is true but Reason (R) is false.

• Assertion (A) is false but Reason (R) is true.

Answer 1

Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

Explanation:

The assertion is true since commercial banks rely solely on public primary cash deposits as fundamental reserves for generating derivative deposits and expanding the money supply. The reason correctly explains this mechanism: the banking system requires this actual money to meet its obligatory legal reserve requirements before making loans. Because fractional-reserve banking requires that no credit be multiplied without an initial cash deposit serving as a baseline, credit creation is impossible without money, which provides an excellent explanation for the assertion.