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Assertion (A): One of the primary functions of a central bank is to act as the lender of last resort.

Reason (R): Central banks can influence interest rates through their monetary policy decisions, which include changes in the policy rate or reserve requirements.

  1. A is true but R is false
  2. A is false but R is true
  3. Both A and R are true and R explains A
  4. Both A and R are true but R does not explain A

Banking

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Answer

Both A and R are true but R does not explain A

Reason — Both statements are factually TRUE. The Assertion is correct because the central bank acts as banker's bank — when commercial banks need funds, they can obtain loans and rediscount their bills with the central bank, which is why it is called the 'lender of last resort'. The Reason is also correct because the central bank does influence interest rates through monetary policy tools (bank rate, CRR, SLR). However, the Reason explains how the central bank conducts monetary policy, which is separate from its role as lender of last resort. Hence, R does not explain A.

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