Question

Assertion (A): Increase in bank rate reduces money supply.
Reason (R): Bank rate is the rate at which RBI lends to commercial banks.

• A. Both (A) and (R) are true and (R) is the correct explanation of (A).
• B. Both (A) and (R) are true but (R) is NOT the correct explanation of (A).
• C. (A) is true but (R) is false.
• D. (A) is false but (R) is true.

Hint:

To solve Assertion-Reason questions, read the assertion, then add the word "BECAUSE" before the reason to see if it makes logical sense.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
The Bank Rate is a tool of monetary policy used by the Central Bank (RBI) to control the volume of credit and money supply in the economy.

Step 2: Evaluating the Reason (R):
The reason correctly defines the Bank Rate. It is the standard rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial papers, effectively lending to commercial banks. So, (R) is true.

Step 3: Evaluating the Assertion (A) and Connection:
When the RBI increases the Bank Rate, the cost of borrowing for commercial banks increases. Consequently, commercial banks increase their lending rates for the public. This discourages borrowing and reduces the money supply. So, (A) is true.

Step 4: Final Answer:
Since the definition of the Bank Rate (R) explains why its increase affects the cost of credit and thus the money supply (A), Option (a) is correct.