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Q60 (IAS/2018) Environment & Ecology › Biodiversity & Protected Areas › Threatened species conservation Official Key

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

Result
Your answer: —  ·  Correct: D
Explanation

The correct answer is option D because withdrawing cash from your demand deposit account merely changes the composition of money supply, not its total amount.

In a modern economy, money consists mainly of currency notes and coins issued by the monetary authority, and apart from[1] these, the balance in savings or current account deposits held by the public in commercial banks is also considered money.[1] Such deposits are called demand deposits as they are payable by the bank on demand from the account-holder.[1]

When you withdraw ₹1,00,000 in cash, your demand deposit decreases by ₹1,00,000, but the cash in your hand (currency with public) increases by ₹1,00,000. Since both demand deposits and currency are components of the money supply, the aggregate money supply remains unchanged—only its form has changed from deposit money to currency.

Options A and B are incorrect because they suggest a change in total money supply, which doesn't occur in a simple withdrawal. Option C is incorrect because there is no multiplier effect in the immediate withdrawal transaction; the money multiplier effect would come into play only when banks lend out deposits, not when depositors simply convert their deposits to cash.

Sources
  1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > THE SUPPLY OF MONEY : VARIOUS MEASURES > p. 47
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Q. 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 e…
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Origin: From standard books Fairness: High fairness Books / CA: 10/10 · 0/10
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This is a 'Definition Check' disguised as a scenario. It tests if you truly understand that Money Supply is the sum of Currency and Demand Deposits. If you rely on rote memorization of formulas without understanding the components, you will overthink this. It is a pure NCERT concept.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Does withdrawing ₹1,00,000 in cash from a demand deposit account immediately reduce the aggregate money supply in the economy by ₹1,00,000?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > THE SUPPLY OF MONEY : VARIOUS MEASURES > p. 47
Presence: 5/5
“In a modern economy money consists mainly of currency notes and coins issued by the monetary authority of the country. In India currency notes are issued by the Reserve Bank of India (RBI), which is the monetary authority in India. However, coins are issued by the Government of India. Apart from currency notes and coins, the balance in savings, or current account deposits, held by the public in commercial banks is also considered money since cheques drawn on these accounts are used to settle transactions. Such deposits are called demand deposits as they are payable by the bank on demand from the account-holder.”
Why this source?
  • Defines money as consisting mainly of currency notes/coins plus balances in savings/current (demand) deposits.
  • Implies conversion between demand deposits and currency leaves the aggregate (these components) unchanged.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Types of Deposits: > p. 52
Presence: 4/5
“• 1. Demand Deposit: Funds held in demand deposits can be withdrawn at any time on demand without any advance notice to the depository institution. Demand deposits can be demanded by an account holder any time and there is no fixed term of maturity for demand deposits. Banks issue cheques on this kind of deposits and cheques can be drawn on these deposits and hence demand deposits are also called cheque-able deposits.• 2. Time Deposit: Funds held in time deposits can be withdrawn only by giving an advance notice to the depository institution. The deposits are held for a specified time period or maturity.”
Why this source?
  • Explicitly defines demand deposits as funds withdrawable on demand and cheque-able — i.e., readily convertible to currency.
  • Supports the view that a withdrawal is a change in composition (deposit → currency) rather than an immediate disappearance of money.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 42
Presence: 3/5
“Since the bank is only expected to keep 20 per cent of its deposits as reserves, thus, reserves of Rs 100 (20per cent of 500 = 100) can support the deposits of Rs 500. In other words, our bank can give a loan of Rs 400. Table 3.3 demonstrates its balance sheet. Thus, money supply increases from Rs 100 to Rs 500. Given a CRR of 20 per cent, the bank cannot give a loan beyond Rs 400. Hence, requirement of reserves acts as a limit to money creation. create deposits of Rs (5 X 100)=Rs 500.”
Why this source?
  • Explains reserve requirement and money-creation via multiplier: reserves support deposits, so changes in bank reserves affect deposit creation capacity.
  • Provides the caveat that while the immediate aggregate (currency + deposits) may not fall, withdrawals reduce bank reserves and can limit future money creation.
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SIMILAR QUESTIONS

IAS · 2020 · Q60 Relevance score: 8.85

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

CDS-II · 2023 · Q120 Relevance score: -4.41

What would be the impact on the economy if people start holding more currency in hand and less in deposits?

CDS-I · 2003 · Q2 Relevance score: -4.55

Consider the following financial transactions: I. Purchase of bankers cheques for Rs. 50,000 and above in one day. II. Cash payment of more than Rs. 25,000 for foreign travel at one time. III. Securities transaction of more than Rs. 1,00,000. IV. Cash deposit of more than Rs. 50,000 in any bank account in one day. During which of these transactions is it compulsory to quote Income Tax Permanent Account Number (PAN) ?

IAS · 2013 · Q60 Relevance score: -4.71

Supply of money remaining the same when there is an increase in demand for money, there will be