If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account

If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be

  1. to reduce it by Rs. 1,00,000
  2. to increase it by Rs. 1,00,000
  3. to increase it by more than Rs. 1,00,000
  4. to leave it unchanged

Answer: D

Explanation

Aggregate money supply (say M) refers to the total stock of money available for use in the economy. So, two absolute basic components of money supply are:

  1. Currency with public (C): This consists of currency notes in circulation issued by RBI, rupee notes & coins in circulations, as well as small coins in circulation.
  2. Demand Deposits of public with Banks (also called as deposit money) (D): These deposits can be withdrawn by public at any point depending upon need.

We can express money supply as: M = C + D

Now, taking out Rs 1 lakh from D would increase C with public. This means that the immediate effect would be a no change in the aggregate money supply in the economy.

  • Exam Year: 2020