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 ✓ UPSC's answer

Why the answer is (d)

• Money supply (M1) = currency with the public + demand deposits with banks.

• Withdrawing ₹1,00,000 in cash reduces demand deposits by ₹1,00,000 and raises currency with the public by the same amount; the two components offset exactly.

• The immediate effect on aggregate money supply is therefore nil — option (d).

• Over time the bank's lower reserves may shrink its lending and reduce money supply through the multiplier, but that is not the immediate effect.

• Hence option (d).

Why the other options are wrong

(a) to reduce it by ₹ 1,00,000: The fall in deposits is matched by a rise in currency held.
(b) to increase it by ₹ 1,00,000: Currency rises but deposits fall equally; no net increase.
(c) to increase it by more than ₹ 1,00,000: There is no immediate multiplier expansion from a withdrawal.

Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2020, held on 4 October 2020. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.