Impact of Cash Withdrawal on Money Supply
Question
If you withdraw ₹ 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
Options
to reduce it by ₹ 1,00,000
to increase it by ₹ 1,00,000
to increase it by more than ₹ 1,00,000
to leave it unchanged
Explanation
Aggregate money supply (M3) consists broadly of Currency with the Public + Demand Deposits with banks + Time Deposits with banks. When you withdraw cash, the Demand Deposits decrease by ₹1,00,000, but simultaneously, the Currency with the Public increases by the exact same amount. The immediate mathematical total remains unchanged. > One-line conceptual takeaway: Simply changing the form of money (from bank deposit to physical cash) does not immediately alter the total money supply in the economy. Answer: (d).
Question details
Year
2020
Paper
GS Paper 1
Question
Q50
Subject
Economy
Sub-topic
Banking & RBI
Type
Factual single
Difficulty
Medium
Nature
Static
Source hint
NCERT Macroeconomics Cl.12
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