Money supply includes currency held by the public and deposits that the public can use for making payments. Interbank deposits are deposits that commercial banks keep with one another and are not available for public transactions. Hence, the assertion is true. The reason is false because interbank deposits are not used by ordinary consumers for purchasing goods and services. They are maintained for settlement and liquidity management among banks only. Therefore, Assertion (A) is true, but Reason (R) is false.

Demand deposits are included in money supply because cheque facilities allow people to make payments directly from their bank accounts. Since these deposits are widely accepted as a medium of exchange, they perform the functions of money. Option C correctly identifies this characteristic.

According to the NCERT definition, M1 = Currency held by the public (CU) + Net Demand Deposits (DD). Given: Currency = ₹200 crore Demand Deposits = ₹300 crore Therefore, M1 = ₹200 crore + ₹300 crore = ₹500 crore. Time deposits are included in M3, not M1. Hence, Option A is correct.

According to NCERT, M2 = M1 + Savings deposits with Post Office Savings Banks. These deposits are relatively liquid and therefore included in M2. Net time deposits are added in M3, while total post office deposits are added in M4. Hence, Option D is correct.

The standard NCERT measures of money supply are: • M1 = Currency with the public + Demand Deposits. • M2 = M1 + Savings deposits with Post Office Savings Banks. • M3 = M1 + Net Time Deposits of commercial banks. • M4 = M3 + Total Post Office deposits (excluding National Savings Certificates). Only Option C correctly matches all four measures.

According to NCERT, M4 = M3 + Total deposits with Post Office savings organisations (excluding National Savings Certificates). M4 is called the broadest and least liquid monetary aggregate because it includes deposits that are less readily available for transactions than those in narrower measures such as M1 and M2. Therefore, Option B correctly identifies the additional component included in M4.

The correct sequence of credit creation is: 1. A person deposits money in a commercial bank. 2. The bank keeps the required CRR as reserves. 3. The remaining excess reserves are lent to borrowers. 4. The borrowed money is deposited again in banks, leading to multiple rounds of deposit creation. Thus, the correct order is 3 → 4 → 1 → 2. Hence, Option C is correct.

Indian currency notes contain the promise made by the Governor of the Reserve Bank of India, stating that the RBI guarantees payment of the value mentioned on the note. This guarantee establishes confidence in fiat money even though it has little intrinsic value. Therefore, Option D is correct.

Statement 1 is correct because the RBI performs banking functions for the Central and State Governments. Statement 2 is incorrect because commercial banks—not the RBI—accept demand deposits from the general public. Statement 3 is correct because the RBI regulates money supply using monetary policy tools such as the Bank Rate, Repo Rate, CRR, and Open Market Operations. Therefore, Statements 1 and 3 are correct. Hence, Option B is the correct answer.

The RBI serves as the custodian of India's foreign exchange reserves. These reserves help maintain confidence in the economy, facilitate international trade and payments, and enable the RBI to stabilize exchange rates when necessary. Therefore, Option A correctly identifies this important function.

Commercial banks maintain a portion of their deposits as reserves with the Reserve Bank of India (RBI) to satisfy statutory requirements such as the Cash Reserve Ratio (CRR). These reserves are assets because they represent claims held by the commercial bank. Loans given to customers and reserves maintained with the RBI together constitute important assets of commercial banks. Therefore, Option D is correct.

Commercial banks generally do not hand over cash immediately when granting loans. Instead, they credit the borrower's account with a new deposit. The borrower can then use this deposit to make payments. Since demand deposits are part of the money supply, this process increases the overall money supply through credit creation. Therefore, Option C is correct.

Commercial banks earn profits by charging borrowers a higher rate of interest than the rate paid to depositors. Here, Interest charged = 9% Interest paid = 4% Interest Spread = 9% − 4% = 5% This difference is known as the interest spread, which contributes significantly to the bank's earnings after meeting operating costs. Therefore, Option A is correct.

Commercial banks lend a significant portion of the deposits they receive while retaining only a fraction as reserves. This system works because banks expect that all depositors will not demand their money at the same time. This principle, known as fractional reserve banking, enables banks to extend loans and create credit while maintaining sufficient liquidity for normal withdrawals. Hence, Option B is correct.

The passage clearly states that the currency issued by the central bank is called high-powered money, reserve money, or monetary base because it serves as the foundation for credit creation by commercial banks. Commercial banks maintain reserves based on this money and extend loans, which leads to multiple expansion of deposits in the banking system. Thus, reserve money forms the base of the money creation process. Therefore, Option D is correct.

The passage explicitly states that the currency issued by the central bank can be held by the public or by the commercial banks. This currency is known as high-powered money, reserve money, or the monetary base because it supports the process of credit creation. Thus, the holders of reserve money are the public and commercial banks, making Option D the correct answer.

A legal tender is a form of money that must be accepted in settlement of debts and payments under the law. Currency notes and coins issued by the RBI and the Government of India are legal tender. Although cheques facilitate payments, no individual is legally bound to accept a cheque as payment. Therefore, cheques are not legal tender, making Option B correct.

The correct matching is: • Demand Deposit → Payable on demand (c) • Time Deposit → Fixed period to maturity (a) • Net Deposits → Includes only deposits of the public held by banks (d) • Interbank Deposits → Excluded from money supply (b) Only Option C correctly matches all four deposit-related concepts according to NCERT.

Fiat money is money whose value is based on the authority and guarantee of the issuing government or central bank, rather than on intrinsic value or precious metals. Indian currency notes derive their acceptability from the legal authority of the RBI and the Government of India. Hence, Option A correctly describes fiat money.

The Assertion is false because cheques are not legal tender. They are negotiable instruments that may be accepted or refused by the payee. The Reason is true because legal tender is money that cannot legally be refused in settlement of debts and payments. Therefore, the correct answer is Option D.