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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…
At a glance
Origin: From standard books Fairness: High fairness Books / CA: 10/10 · 0/10

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.
Statement 2
Does withdrawing ₹1,00,000 in cash from a demand deposit account immediately increase 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 supply components as currency notes + balances in demand (current/savings) accounts.
  • Since both cash and demand deposits are counted as money, moving funds from a deposit to cash changes composition, not the total.
  • Directly implies an immediate withdrawal converts one counted form of money into another, leaving aggregate unchanged.
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: 4/5
“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 how reserves support deposit levels and how deposits are part of money supply via the money multiplier.
  • Shows that deposits (not just cash) constitute money; a mere conversion to cash does not create new money instantly.
  • Implicates that only changes in deposit creation/lending (not a simple withdrawal) change aggregate supply.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.12 Money Creation > p. 58
Presence: 4/5
“So, now the first person has money H (H/2 as cash and H/2 in the deposit form) and the second person (P2) has money 0.8 (H/2) i.e. 0.4 H. So, the total money supply in the economy increases from H to H + 0.4H = 1.4H. This has been possible because banks have been given the liberty to keep only a fraction of the deposited money as reserve in their vaults and the rest they can lend to others. (This is called "fractional reserve banking"). So, additional money is getting created through fractional reserve banking.”
Why this source?
  • Describes fractional reserve banking where cash + deposits together determine total money created.
  • Illustrates that deposits and cash both feature in the summed money stock; withdrawals shift the split between them.
  • Supports the view that immediate effect of conversion (deposit→cash) is not an increase in aggregate money.
Statement 3
Does withdrawing ₹1,00,000 in cash from a demand deposit account immediately increase the aggregate money supply in the economy by more than ₹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?
  • Explicitly states that both currency (notes & coins) and balances in current/savings accounts (demand deposits) are counted as money.
  • Implied consequence: converting demand deposits into currency shifts composition of money (deposit → currency) rather than adding a new category of money.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.12 Money Creation > p. 58
Presence: 4/5
“So, now the first person has money H (H/2 as cash and H/2 in the deposit form) and the second person (P2) has money 0.8 (H/2) i.e. 0.4 H. So, the total money supply in the economy increases from H to H + 0.4H = 1.4H. This has been possible because banks have been given the liberty to keep only a fraction of the deposited money as reserve in their vaults and the rest they can lend to others. (This is called "fractional reserve banking"). So, additional money is getting created through fractional reserve banking.”
Why this source?
  • Describes fractional reserve banking where banks lend a portion of deposits, creating additional deposits and thus expanding money supply.
  • By contrast, mere withdrawal of deposits into cash does not by itself generate the lending/deposit-creation process that increases money beyond the amount withdrawn.
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: 4/5
“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?
  • Shows how reserves (CRR) support a multiple of deposits — i.e., money creation depends on reserves retained in banks.
  • Withdrawal reduces bank deposits/reserves available for lending and so limits (rather than immediately increases) further money creation beyond the withdrawn amount.
Statement 4
Does withdrawing ₹1,00,000 in cash from a demand deposit account immediately leave the aggregate money supply in the economy unchanged?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > TOOLS TO MEASURE MONEY SUPPLY > p. 159
Presence: 5/5
“In 1998, the following three new monetary aggregates and three liquidity aggregates were introduced: • New Monetary Aggregates: NM<sub>1</sub>, NM<sub>2</sub> and NM<sub>3</sub> Ø Liquidity Aggregates: L_1, L_2 and L_3 • NM_1 = Currency with the public + Demand deposits with the banking system + 'Other' deposits with RBI • NM_2 = NM_1 + Short-term time deposits of residents (including and up to the contractual maturity of 1 year) • NM_3 = NM_2 + Long-term time deposits of residents + Call/Term funding from financial institutions • L_1 = NM_3 + All deposits with Post Office Savings Banks (excluding L_3 = L_2 + Public deposits of Non-Banking Financial Companies (NBFCs)”
Why this source?
  • Defines a monetary aggregate (NM1) that explicitly includes both currency with the public and demand deposits.
  • If both components are counted in the same aggregate, converting one (demand deposit) into the other (currency) keeps the aggregate unchanged.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > THE SUPPLY OF MONEY : VARIOUS MEASURES > p. 47
Presence: 4/5
“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?
  • States that currency (notes/coins) and balances in demand deposits are both considered money in a modern economy.
  • Supports the idea that a shift between these forms does not remove money from the measured supply.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Types of Deposits: > p. 52
Presence: 3/5
“• 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?
  • Defines demand deposits as funds withdrawable at any time and cheque-able, confirming their convertibility into cash on demand.
  • Helps show the mechanical possibility of converting demand deposits into currency without changing the nature of money held by the public.
Pattern takeaway: UPSC loves 'Accounting Identity' questions. They often ask about the *immediate* mechanical effect of a transaction (e.g., OMOs, withdrawals, devaluation) before the economic multiplier kicks in. Always check if the transaction is just swapping one component of the definition for another.
How you should have studied
  1. [THE VERDICT]: Sitter. Directly solvable from Macroeconomics NCERT Class XII, Chapter 3 (Money and Banking).
  2. [THE CONCEPTUAL TRIGGER]: The definition of Money Supply (M1/M3) and its components: Currency with Public + Demand Deposits.
  3. [THE HORIZONTAL EXPANSION]: Memorize the hierarchy: M0 (Reserve Money/High Powered Money), M1 (Narrow Money), M3 (Broad Money), and M4. Understand the Money Multiplier formula [(1+cdr)/(cdr+rdr)] and how changes in the Currency Deposit Ratio (cdr) affect the multiplier.
  4. [THE STRATEGIC METACOGNITION]: Do not just memorize 'M1 = C + DD'. Simulate transactions in your head: 'If I deposit cash, what happens? If I withdraw? If RBI buys bonds?' Distinguish between 'Immediate Accounting Effect' (this question) and 'Long-term Multiplier Effect'.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Components of Money Supply (currency + demand deposits)
💡 The insight

References identify currency and demand deposits as the main components counted as money; understanding these shows why converting one into the other does not immediately change aggregate money.

High-yield for UPSC: this concept is central to questions on money supply measures (M1, etc.), links to banking and macro topics, and enables answering questions about withdrawals, deposits and demonetization. Master via NCERTs and standard economy texts and apply to factual scenarios and policy questions.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > THE SUPPLY OF MONEY : VARIOUS MEASURES > p. 47
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Types of Deposits: > p. 52
🔗 Anchor: "Does withdrawing ₹1,00,000 in cash from a demand deposit account immediately red..."
📌 Adjacent topic to master
S1
👉 Demand deposit convertibility & its role as money
💡 The insight

Demand deposits are defined as withdrawable on demand and cheque-able, so withdrawing cash is a composition change rather than an immediate loss of money.

Important for exam items on liquidity, payment media and banking operations; helps explain why bank deposits function like cash and bridges topics across monetary economics and banking regulation. Use examples (withdrawals, cheques) to practice application.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Types of Deposits: > p. 52
  • Understanding Economic Development. Class X . NCERT(Revised ed 2025) > Chapter 3: MONEY AND CREDIT > Deposits with Banks > p. 39
🔗 Anchor: "Does withdrawing ₹1,00,000 in cash from a demand deposit account immediately red..."
📌 Adjacent topic to master
S1
👉 Monetary base vs money supply and reserve (multiplier) effect
💡 The insight

References distinguish monetary base and money supply and show reserve ratios determine how reserves support deposits — withdrawals affect bank reserves and hence future deposit creation.

Essential for questions on how bank reserves, CRR and the money multiplier influence the broader money supply; helps answer nuanced questions about immediate vs medium-term effects (composition vs creation). Study balance-sheet examples and multiplier arithmetic.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.11 Money Circulation > p. 56
  • 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
🔗 Anchor: "Does withdrawing ₹1,00,000 in cash from a demand deposit account immediately red..."
📌 Adjacent topic to master
S2
👉 Components of Money Supply (currency + demand deposits)
💡 The insight

The question hinges on the definition that both currency and demand deposits are included in money supply; converting between them affects composition, not total.

High-yield for UPSC: many questions test M1/M2 definitions and consequences of cash/deposit flows. Mastering this helps solve immediate-effect questions (withdrawals, transfers) and links to banking and payments topics. Revise central definitions and apply quick compositional checks in answer writing.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > THE SUPPLY OF MONEY : VARIOUS MEASURES > p. 47
  • Understanding Economic Development. Class X . NCERT(Revised ed 2025) > Chapter 3: MONEY AND CREDIT > Deposits with Banks > p. 39
🔗 Anchor: "Does withdrawing ₹1,00,000 in cash from a demand deposit account immediately inc..."
📌 Adjacent topic to master
S2
👉 Fractional Reserve Banking and Money Creation (money multiplier)
💡 The insight

Withdrawal changes banks' reserves and hence the capacity to create deposits later, so understanding the multiplier clarifies immediate vs subsequent effects.

Essential for questions on credit creation, reserve requirements, and how policy tools (CRR) affect money supply. Enables tackling dynamic questions (short-run vs long-run effects) and numerical multiplier problems in papers.

📚 Reading List :
  • 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
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.12 Money Creation > p. 58
🔗 Anchor: "Does withdrawing ₹1,00,000 in cash from a demand deposit account immediately inc..."
📌 Adjacent topic to master
S2
👉 Immediate vs Secondary (dynamic) effects of cash withdrawals
💡 The insight

The evidence contrasts an immediate compositional shift (cash vs deposit) with secondary effects (reduced deposits, altered lending) as seen during demonetisation and base-money changes.

Useful for essay/GS answers where nuance is required — distinguishes mechanical accounting effects from behavioural or policy-driven changes over time. Helps structure answers on demonetisation, liquidity shocks, and transmission of monetary policy.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Impact of Demonetization in the short run: > p. 57
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.11 Money Circulation > p. 56
🔗 Anchor: "Does withdrawing ₹1,00,000 in cash from a demand deposit account immediately inc..."
📌 Adjacent topic to master
S3
👉 Components of Money Supply: Currency vs Demand Deposits
💡 The insight

References state that currency and demand deposits are both counted as money, so conversion between them affects composition but not immediate aggregate.

High-yield for UPSC: many questions ask about M1/M2 definitions and implications of transactions (withdrawals/deposits). Mastering this clarifies when a transaction changes money supply versus when it just reclassifies components. Links to banking, payments, and monetary policy questions.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > THE SUPPLY OF MONEY : VARIOUS MEASURES > p. 47
  • Understanding Economic Development. Class X . NCERT(Revised ed 2025) > Chapter 3: MONEY AND CREDIT > Deposits with Banks > p. 39
🔗 Anchor: "Does withdrawing ₹1,00,000 in cash from a demand deposit account immediately inc..."
🌑 The Hidden Trap

The 'Next Logical Question' is about the *secondary* effect. While the immediate money supply is unchanged, withdrawing cash increases the Currency-Deposit Ratio (cdr). This mathematically reduces the Money Multiplier, meaning the *potential* future money supply will decrease as banks have less reserves to lend.

⚡ Elimination Cheat Code

Use the 'Pocket vs. Wallet' logic. Your Demand Deposit is just a digital wallet; your Cash is a physical wallet. Moving money from your left pocket (Bank) to your right pocket (Cash) does not change your total wealth or the total money available to the public. Immediate effect = Zero change.

🔗 Mains Connection

Link this to GS3 (Mobilization of Resources) and Financial Inclusion. Why does the government push for Jan Dhan and Digital Payments? Because depositing cash into banks (C -> DD) doesn't change immediate money supply, but it increases the Money Multiplier, allowing banks to create more credit for the economy.

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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