UPSC Prelims 2020 · Question 10 of 100
UPSC Prelims 2020 question on Cash Withdrawal Money Supply
- ExamUPSC CSE
- Year2020
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicMoney Market
- DifficultyEasy
- TypeDirect
If you withdraw Rs. 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
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Answer: D. to leave it unchanged
There are 4 concepts of money supply: M1, M2, M3 and M4.
M1 = C + DD + OD, where C = currency held by the public, DD = net demand deposits with banks, OD = other deposits.
M3 = M1 + TD = C + DD + OD + TD (Broad money), where TD = time deposits.
In the given case, when you withdraw Rs. 1,00,000 in cash from a Demand Deposit Account, the 'DD' (demand deposit) component falls by Rs. 1,00,000, while the 'C' (currency) component increases by Rs. 1,00,000.
Since both components are part of M1 (and hence M3), the net effect on money supply is zero — the money supply remains unchanged.
Hence option (d) — to leave it unchanged — is the correct answer.