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UPSC Prelims 2020 Paper-1 📅 04 Oct, 2020

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

A
to reduce it by Rs. 1,00,000
B
to increase it by Rs. 1,00,000
C
to increase it by more than Rs. 1,00,000
D
to leave it unchanged
Result Summary
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UPSC Prelims
2020 • 04 Oct, 2020 • Paper-1
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
Correct Answer
to leave it unchanged
Money Supply Composition: The standard macroeconomic measure of broad money supply (M3) in an economy structurally encompasses both the physical currency held b......
Ref/Book : UPSC Prelims 2020
Ref. Subject Economy
Chapter -
Ref. Topic Monetary Policy
Pg. No -
💡 Analysis & Explanation
Money Supply Composition ▼
The standard macroeconomic measure of broad money supply (M3) in an economy structurally encompasses both the physical currency held by the public and the demand deposits held by individuals in banking institutions.
Mechanism of Withdrawal ▼
When a person withdraws cash from their bank account, the accounting volume of demand deposits in the banking system decreases by the exact same mathematical amount that the physical currency in the hands of the public increases.
Macroeconomic Impact ▼
Because both components (currency in circulation and bank deposits) are already fully counted within the aggregate money supply calculation, this action is merely a shift in the form of the money (from a digital entry to paper currency). The total sum remains completely identical.
Conclusion ▼
Therefore, a direct withdrawal leaves the aggregate money supply statistically unchanged.
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