Q50 · UPSC Prelims 2020 · Set A · Economy

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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

A to reduce it by Rs. 1,00,000
B to increase it by Rs. 1,00,000
C to increase it by more than Rs. 1,00,000
D to leave it unchanged

Correct answer: (d) to leave it unchanged

Explanation

  1. A

    to reduce it by Rs. 1,00,000

    Reduce M3 by ₹1 lakh. Currency in hand is still money.

  2. B

    to increase it by Rs. 1,00,000

    Increase by ₹1 lakh. Double-counts; deposits fall as cash rises.

  3. C

    to increase it by more than Rs. 1,00,000

    Increase by more. Multiplier talk is not the immediate effect.

  4. D

    to leave it unchanged

    Leave it unchanged. Demand deposits fall; currency with the public rises by the same amount. Immediate M3 is the same.

Summary. Official key is (d). Withdrawing cash from a demand deposit swaps one component of money supply for another. Immediately, aggregate money supply is unchanged.

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