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
- 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
Explanation
Option (d) is correct
- M1 is the money supply that is composed of currency, demand deposits, and other liquid deposits, which include savings deposits. M1 includes the most liquid portion of the money supply because it contains currency and assets that are either cash or can be quickly converted to cash. However, “near money” and “near, near money,” which fall under M2 and M3, cannot be converted to currency as quickly.
- When you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account, it alters the composition of the money supply but does not impact the overall money supply.
- Demand Deposit Accounts are part of M1, a broader measure of the money supply that includes currency (cash) and demand deposits (such as checking accounts). Withdrawing Rs. 1,00,000 in cash simply converts demand deposits into cash. As a result, the immediate effect on the money supply composition is a reduction in demand deposits by Rs. 1,00,000 and a corresponding increase in cash by the same amount.
- However, the aggregate money supply (M1) remains unchanged, as the total value of money (demand deposits + cash) remains constant.
