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Q60 (IAS/2020) Economy › Money, Banking & Inflation › Monetary aggregates 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 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.

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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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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If ₹1,00,000 is withdrawn in cash from a Demand Deposit Account at a bank, does the aggregate money supply in the economy immediately reduce by ₹1,00,000?
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. 158
Presence: 5/5
“The various measures of money supply vary in terms of the liquidity they possess. Following are the tools through which supply of money is measured by the Reserve Bank of India (RBI): • Name: M_0; Equals: Currency in circulation + Bankers' deposits with RBI + 'Other' deposits • Name: (Reserve money); Equals: Reserve money; Equals: with RBI • Name: M,; Equals: Currency with the public + Demand deposits with the banking system + 'Other' deposits with RBI”
Why this source?
  • 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.
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?
  • 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.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.11 Money Circulation > p. 55
Presence: 4/5
“500 • Individual: ; Col2: ; Commercial Bank: ; RBI: Rs. 500; Col5: Rs. 500 Money Supply = Rs. 500 Suppose the individual thinks that he requires only Rs. 200 for his cash transactions and deposits Rs. 300 in bank for safety purpose and to earn interest. This can be represented as following. • Individual: ; Col2: Assets; Commercial Bank: Liability; Col4: Assets; RBI: Liability • Individual: Rs. 200 Note 300 in A/c; Col2: Vault Cash = Rs. 300; Commercial Bank: Deposits of Public = Rs. 300; Col4: Gold = Rs. 500; RBI: Currency held by Public 200 Vault Cash held by banks = Rs.”
Why this source?
  • 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.
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