Civil Services Prep

Prelims 2020 · Economy · Question 10

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

  1. to reduce it by Rs. 1,00,000
  2. to increase it by Rs. 1,00,000
  3. to increase it by more than Rs. 1,00,000
  4. to leave it unchanged

Answer

to leave it unchanged

  • (a) Reduce by Rs. 1,00,000: Wrong. A withdrawal from a demand deposit converts bank deposit money into currency with the public; both are components of money supply.
  • (b) Increase by Rs. 1,00,000: Wrong. There is only a change in composition of money supply, not a net addition.
  • (c) Increase by more than Rs. 1,00,000: Wrong. No money creation happens merely by withdrawing cash from your own account.
  • (d) Leave it unchanged: Correct. Aggregate money supply = currency with the public + demand deposits; one falls by Rs. 1,00,000 and the other rises by Rs. 1,00,000, so total remains unchanged.
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