Money and Credit Assertion & Reason Questions

In the following questions given below, there are two statements marked as Assertion (A) and Reason (R). Read the statements and choose the correct option:

1. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
2. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
3. Assertion (A) is true, but Reason (R) is false.
4. Assertion (A) is false, but Reason (R) is true.

Q 1.

Assertion (A): Currency is considered to be important for a country.

Reason (R): Currency gives nation a purchasing power and facilitates trade.

Answer: A

Both statements are true and the reason correctly explains why currency is important for a country.

Q 2.

Assertion (A): Banks keep a small proportion of their deposits as cash with themselves.

Reason (R): This is kept to meet the loan requirements of the people.

Answer: C

The assertion is true but the reason is false. Banks keep cash reserves primarily to meet withdrawal demands, not loan requirements.

Q 3.

Assertion (A): No individual or organisation is allowed to issue currency notes in India.

Reason (R): In India, only RBI issues currency notes on behalf of the Central Government.

Answer: A

Both statements are true and the reason correctly explains the assertion about currency issuance in India.

Q 4.

Assertion (A): Not all the money that is deposited in the bank by the depositors is kept by the banks themselves.

Reason (R): They use it to further extend loans to people, so that the difference between interest earned and interest given can be further invested and the chain will continue to go on.

Answer: B

Both statements are true but the reason doesn't directly explain why banks don't keep all deposited money.

Q 5.

Assertion (A): Banks have to submit information to the Finance Minister periodically on how much they are lending, to whom, at what interest rate, etc.

Reason (R): The Finance Minister monitors the banks in actually maintaining cash balance.

Answer: D

The assertion is false (banks report to RBI, not Finance Minister) while the reason is true (cash balance monitoring is important).

Q 6.

Assertion (A): The modern currency is used as a medium of exchange; however, it does not have a use of its own.

Reason (R): Modern currency is easy to carry.

Answer: B

The modern currency is used as a medium of exchange because it is accepted and authorized as a medium of exchange by a country's government.

Q 7.

Assertion (A): In India, no individual can refuse to accept a payment made in rupees.

Reason (R): Rupee is the legal tender in India.

Answer: A

The law legalizes the use of rupee as a medium of payment that cannot be refused in settling transactions in India.

Q 8.

Assertion (A): The facility of demand deposits makes it possible to settle payments without the use of cash.

Reason (R): Demand deposits are paper orders which make it possible to transfer money from one person's account to another person's account.

Answer: D

The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash. Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.

Q 9.

Assertion (A): Banks keep only a small proportion of their deposits as cash with themselves.

Reason (R): Banks in India these days hold about 15 per cent of their deposits as cash.

Answer: B

Banks keep only a small proportion of their deposits as cash with themselves because they use the major portion of the deposits to extend loans as there is a huge demand for loans for various economic activities.

Q 10.

Assertion (A): Banks charge a higher interest rate on loans than what they offer on deposits.

Reason (R): The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

Answer: A

Banks in India hold about 15 per cent of their deposits as cash as the remaining deposits are used to provide loans. The interest charged on loans is higher than the interest paid on deposits and the difference between the two interest rates is the major source of income for banks.

Q 11.

Assertion (A): Rohan took credit in the form of advance payment from a buyer and he delivered the goods to the buyer on time and also earned profit. The credit made Rohan better off in this situation.

Reason (R): Credit can never push a person into a debt trap.

Answer: C

The credit made Rohan better off in this situation, however, Rohan would have been worse off if he had failed to deliver the goods on time or he had made a loss in the production process. The latter two situations may have caused Rohan to fall in a debt trap.

Q 12.

Assertion (A): Credit would be useful or not depends on the risk involved in a situation.

Reason (R): The chance of benefitting from credit is highest in agriculture sector.

Answer: C

Whether credit would be useful or not depends on the risks in the situation and whether there is some support, in case of loss.

Q 13.

Assertion (A): Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.

Reason (R): Collateral is given as the lender can sell the collateral to recover the loan amount if the borrower fails to repay the loan.

Answer: A

Property such as land titles, deposits with banks, livestock are some common examples of collateral used for borrowing. In case of failure of repayment of loan, the lender can sell the collateral to recover the loan amount.

Q 14.

Assertion (A): The terms of deposit are same for all credit arrangements.

Reason (R): Credit arrangements are very complex process so to remove the complexities same terms of deposits are used.

Answer: D

The terms of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and the borrower.

Q 15.

Assertion (A): The Reserve Bank of India supervises the functioning of formal sources of loans.

Reason (R): The RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc.

Answer: B

The RBI oversees the functioning of commercial banks. The reason statement substantiates the assertion but it is not the explanation for the assertion.

Answer Key

Q1: (a)

Q2: (c)

Q3: (a)

Q4: (b)

Q5: (d)

Q6: (b)

Q7: (a)

Q8: (d)

Q9: (b)

Q10: (a)

Q11: (c)

Q12: (c)

Q13: (a)

Q14: (d)

Q15: (b)