Question map
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
Explanation
The correct answer is Option 4: to leave it unchanged.
In monetary economics, the aggregate money supply (specifically M1) is defined as the sum of Currency with the Public and Demand Deposits with banks. When you withdraw ₹1,00,000 in cash from your demand deposit account, two simultaneous changes occur within the M1 components:
- Currency with the Public increases by ₹1,00,000.
- Demand Deposits decrease by ₹1,00,000.
Since both components are parts of the same aggregate measure, the transaction represents a mere recomposition of the money supply rather than a change in its total volume. The net effect is zero. Options 1, 2, and 3 are incorrect because they suggest a change in the total value, whereas the immediate impact is neutral. While this withdrawal might affect the "money multiplier" and future credit creation over time, the immediate effect on the aggregate money supply remains unchanged.
PROVENANCE & STUDY PATTERN
Full viewThis is a textbook 'Sitter' derived directly from the definition of M1 in NCERT Macroeconomics. It tests fundamental clarity: do you know that 'Money Supply' includes both currency held by the public AND demand deposits? The key is the word 'immediate'—it filters out secondary multiplier effects.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: If ₹1,00,000 is withdrawn in cash from a Demand Deposit Account at a bank, does the aggregate money supply in the economy immediately reduce by ₹1,00,000?
- Statement 2: If ₹1,00,000 is withdrawn in cash from a Demand Deposit Account at a bank, does the aggregate money supply in the economy immediately increase by ₹1,00,000?
- Statement 3: If ₹1,00,000 is withdrawn in cash from a Demand Deposit Account at a bank, does the aggregate money supply in the economy immediately increase by more than ₹1,00,000?
- Statement 4: If ₹1,00,000 is withdrawn in cash from a Demand Deposit Account at a bank, does the aggregate money supply in the economy remain unchanged immediately?
- Defines a money measure (M1) as the sum of currency with the public plus demand deposits, so both components are counted in aggregate money.
- A transfer from demand deposits to currency changes the composition (deposit → currency) but not the summed components that define M1.
- Explains that demand deposits are considered money because cheques drawn on these accounts settle transactions, linking deposits to the money stock.
- By treating both currency and demand deposits as money, a withdrawal merely shifts money from one form to another within the same aggregate.
- Provides an illustrative balance-sheet example where an individual's choice between holding cash and deposits leaves the overall money supply unchanged.
- Demonstrates that depositing cash into a bank or withdrawing cash from a bank alters vault cash vs. deposits but keeps the total money figure intact in the example.
- Defines monetary aggregates (M1) and lists its components as currency in circulation plus demand deposits.
- If M1 = currency with public + demand deposits, converting between these two components leaves the aggregate unchanged.
- States that modern money consists mainly of currency notes and demand deposits, both being counted as money.
- Shows demand deposits are part of the money stock, so withdrawal simply changes composition (deposit → currency) not total money.
- Provides a worked example where an individual's shift between cash and bank deposit leaves the total money supply figure the same.
- Illustrates that moving funds from deposit to cash does not by itself create additional aggregate money.
- Defines money as currency plus demand (current/savings) deposits, so both components are counted in the money aggregate.
- Withdrawing from a demand deposit converts one counted component (deposit) into another counted component (currency), leaving the total unchanged.
- Worked example shows an individual's cash holdings and bank deposits together composing the same total money supply.
- Demonstrates that shifting funds between cash and deposits does not alter the aggregate money supply figure in the example.
- Breaks down monetary base and components (currency held by public, vault cash, deposits), illustrating how different items sum to the same money total.
- Illustrates that redistribution between currency and deposits changes composition of reserves but not the aggregate money measure in the base example.
- Defines M1 (narrow money) as currency with the public + demand deposits + other items — both currency and demand deposits are counted in the same money aggregate.
- By showing both components are included in the same measure, it implies converting a demand deposit into cash changes composition but not the sum of M1 immediately.
- States that money in a modern economy consists mainly of currency notes and demand deposits held in commercial banks.
- Confirms that both forms are treated as money, so a swap between them leaves the overall money stock (as measured) unchanged immediately.
- Defines demand deposits as funds withdrawable at any time on demand, establishing the practical mechanism for immediate conversion to cash.
- Supports the immediacy of the transaction (deposit → cash), which is necessary for assessing the immediate effect on measured money supply.
- [THE VERDICT]: Sitter. Solvable purely via NCERT Class XII Macroeconomics (Chapter 3: Money and Banking).
- [THE CONCEPTUAL TRIGGER]: The components of Money Supply (M1 = C + DD) and the distinction between 'High Powered Money' (M0) and 'Broad Money' (M3).
- [THE HORIZONTAL EXPANSION]: Memorize the hierarchy: M1 (Most Liquid: Currency + DD), M3 (Aggregate Monetary Resources: M1 + Time Deposits), M0 (Reserve Money: Currency + Bankers' Deposits with RBI). Also, the Money Multiplier formula: m = M3/M0. Understand that 'Currency with Public' is a leakage from the banking system.
- [THE STRATEGIC METACOGNITION]: Always distinguish between 'Accounting Identity' (Immediate effect) and 'Economic Consequence' (Long-term effect). Immediately, it's just a swap of assets (Deposit → Cash). Long-term, it reduces the bank's lending capacity (Reverse Multiplier), but the question specifically asked for the immediate effect.
M1 is composed of currency with the public plus demand deposits, so moving funds between these two does not change M1.
High-yield for banking and money-supply questions: knowing M1 composition lets an aspirant quickly determine whether cash withdrawals alter the measured money stock. It links to topics on liquidity, payment media, and definitions of money used in macroeconomic questions; enables elimination-style reasoning in MCQs and short-answer questions.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > TOOLS TO MEASURE MONEY SUPPLY > p. 158
- Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > THE SUPPLY OF MONEY : VARIOUS MEASURES > p. 47
Monetary base and broader money measures are distinct; actions that change reserves or base (government deposits with RBI) can alter money supply differently than mere deposit–cash swaps.
Important for questions on monetary operations and policy: understanding this distinction clarifies when an action truly shrinks aggregate money versus when it only alters composition. It connects to RBI operations, fiscal transactions, and money-multiplier logic, enabling candidates to reason about cause–effect in policy scenarios.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.11 Money Circulation > p. 56
Cash withdrawals change bank reserves and deposits, which affects how much money banks can create via lending under CRR constraints.
Crucial for questions on how banking behavior and reserve ratios influence the deposit multiplier and hence the broader money supply. Mastery helps answer applied problems on credit creation, limits to money expansion, and impacts of changes in public cash holdings.
- 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 > 2.11 Money Circulation > p. 55
M1 aggregates currency with the public and demand deposits, so conversions between them do not change M1.
High-yield for UPSC: understanding monetary aggregates helps answer questions on money supply, liquidity, and policy impact. It links to topics on central bank operations, monetary indicators, and inflation analysis. Questions often ask how transactions affect measured money supply, so mastering M1 composition enables quick elimination of wrong options.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > TOOLS TO MEASURE MONEY SUPPLY > p. 158
- Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > THE SUPPLY OF MONEY : VARIOUS MEASURES > p. 47
Shifting funds from demand deposits to cash changes composition of money holdings but not the aggregate money stock measured by M1.
Essential for UPSC candidates to distinguish compositional changes from changes in aggregate money supply; useful in answering questions on withdrawals, deposits, and immediate vs. secondary effects. Connects to bank balance-sheet mechanics and liquidity analysis.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.11 Money Circulation > p. 55
- Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > THE SUPPLY OF MONEY : VARIOUS MEASURES > p. 47
Banks keep only a fraction as reserves and can lend the rest, which can expand deposits and thereby increase aggregate money beyond base cash.
Important for explaining when aggregate money does change (through lending), not merely on cash-deposit conversions. Links directly to policy topics like CRR, credit creation, and multiplier effects—common UPSC themes on monetary policy and banking sector influence on money supply.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.12 Money Creation > p. 58
- 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
The money aggregate is the sum of currency held by the public and demand deposits, so converting one into the other does not raise the total.
High-yield for monetary economics questions: it explains immediate effects of cash withdrawals and deposits, links to definitions of M1/Monetary base, and helps answer questions about composition versus level of money supply. Mastery enables quick elimination of distractors that confuse composition changes with net changes.
- 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 > 2.11 Money Circulation > p. 55
The 'Reverse Multiplier' Effect. While the immediate money supply is unchanged, the withdrawal increases the 'Currency-Deposit Ratio' (cdr). A higher cdr reduces the Money Multiplier value in the long run, eventually contracting the total money supply via reduced credit creation.
Use the 'Left Pocket to Right Pocket' heuristic. Money Supply measures the total liquid purchasing power with the public. If you move ₹1L from your bank (Left Pocket) to your wallet (Right Pocket), your total purchasing power hasn't changed. Therefore, the aggregate must remain unchanged.
Link this to Central Bank Digital Currency (CBDC). A shift from Bank Deposits to CBDC (e-Rupee) is technically a liability shift from the Commercial Bank to the Central Bank. Like cash withdrawal, this could theoretically reduce the credit creation capacity of commercial banks (disintermediation risk), a major debate in GS-3 Economy.