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.