Question

Assertion: M₀ is the monetary liability of Reserve Bank of India.

Reason: Reserve Bank of India controls credit whereas Commercial Bank can only create credit.

Options

• Both Assertion and Reason are true and Reason is the correct explanation of Assertion.

• Both Assertion and Reason are true but Reason is not the correct explanation of Assertion.

• Assertion is true and Reason is false. 

• Both Assertion and Reason are false.

Answer 1

Both Assertion and Reason are true but Reason is not the correct explanation of Assertion.

Explanation: 

M₀ (reserve money/high‑powered money) consists of currency issued by the RBI and the reserves of commercial banks items that are monetary liabilities of the RBI. The RBI, using instruments like CRR, open‑market operations and bank rate, controls the overall volume of credit while commercial banks create credit through deposit‑ and loan‑making.