Question

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 1

Correct Answer - Option 4 : to leave it unchanged

The correct answer is to leave it unchanged.

•  Demand Deposit Account
  • It consists of funds held in a bank account from which deposited funds can be withdrawn at any time while a term deposit account restricts access for a predetermined time.
  • Current Account and Savings Account are Demand Deposit Accounts.
  • Some banks ask their customers to maintain a minimum balance in the account.
• The money supply is the total value of money available in an economy at a point of time.
• Money supply consists of total currency circulating in the public plus the demand deposits of the public with banks.
• Hence, we can write Money Supply = Currency with public + Currency in the bank.
• If we look at the equation; when you draw cash from the bank, it goes to the currency in hand but it does not change the value of the money supply.
• Hence, there will be no change in the aggregate money supply.

• Money Aggregate = NM0 (monetary base) + NM1 (narrow money) + NM2 + NM3 (broad money)
• NM0 is the sum of Currency in Circulation, Bankers’ Deposits with RBI, and ‘Other’ Deposits with RBI.
• NM1 is the sum of Currency with the Public, Demand Deposits with the Banking System, and ‘Other’ Deposits with RBI.
• NM2 is the sum of Currency with the Public, Current Deposits with the Banking System, Savings Deposits with the Banking System, Certificates of Deposits issued by Banks, Term Deposits of residents with a contractual maturity up to and including one year with the Banking System, and ‘Other’ Deposits with RBI.
• NM3 is the sum of Currency with the Public, Current Deposits with the Banking System, Savings Deposits with the Banking System, Certificates of Deposits issued by Banks, Term Deposits of residents with the Banking System, Call/Term borrowings from ‘Non-depository’ financial corporations by the Banking System, and ‘Other’ Deposits with RBI.