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 economy will be
(a) to reduce it by ₹1,00,000
(b) to increase it by ₹1,00,000
(c) to increase it by more than ₹1,00,000
(d) to leave it unchanged
Correct Answer – (d) to leave it unchanged
Question from UPSC Prelims 2020 GS Paper
Explanation:
Aggregate money supply
The aggregate money supply in an economy is typically considered to include both physical currency (cash) in circulation and demand deposits (balances in bank accounts that can be accessed on-demand).
When you withdraw ₹1,00,000 in cash from your Demand Deposit Account, you are essentially converting one form of money (bank deposits) into another form of money (physical currency).
The total amount of money in the economy (the sum of physical currency and demand deposits) does not change due to this transaction. You have simply changed the composition of the money supply, not the total amount.
Therefore, the immediate effect on the aggregate money supply in the economy is to leave it unchanged.
