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

  • to reduce it by 1,00,000
  • to increase it by 1,00,000
  • to increase it by more than 1,00,000
  • to leave it unchanged

Answer: (d) to leave it unchanged

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) and Time Deposits with commercial banks.
  • 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.
Money Supply
  • The money supply is the total amount of money used by the general public at a given point in time.
    • It should be emphasized that total money supply and total money stock are two different things.
    • Only that part of the overall stock of money with the public at any given time is considered the money supply.
    • Currency, printed notes, money in bank accounts, and other liquid assets make up circulating money.
  • Narrow money is also known as M1 and M2. Broad money means M3 and M4. The liquidity of these grades is decreasing. M1 is the most liquid and makes transactions the easiest, while M4 is the least liquid.
    • The most commonly used indicator of the money supply is M3. It is also known as the total amount of financial resources.
  • Reserve Money (M0): Other names include High-Powered Money, Financial Base, Base Money, etc. M0 is calculated as follows: Money in circulation + Bankers’ deposits + Other deposits with RBI. It is the economic foundation’s currency.
  • Narrow Money (M1): M1 equals money in circulation plus demand deposits in the banking system (current and savings accounts) plus additional deposits with the Reserve Bank of India (RBI).
  • Narrow Money (M2): Post Office Savings, Bank Savings Deposits added to M1 equals M2.
  • Broad Money (M3): M3 equals M1 plus time deposits made with banks.
  • Broad Money (M4): M4 is equal to M3 plus any deposits made at post office savings banks.