If you withdraw Rs1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be
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UPSC CSP Previous Year Paper (2020)
to reduce it by Rs1,00,000
Incorrect Answer to increase it by Rs 1,00,000
Incorrect Answer to increase it by more than Rs 1,00,000
Incorrect Answer to leave it unchanged
Correct AnswerExplanation:
- It will remain unchanged since the money supply includes both cash/currency with public at hand and demand deposits. Withdrawing cash from demand deposit only puts it with the public i.e. M3 = Currency in circulation + Demand & Time deposits in Bank, hence no change in M.
Hence option 4th is correct.
Additional Information
RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4.
- M1 = CU + DD
- M2 = M1 + Savings deposits with Post Office savings banks
- M3 = M1 + Net time deposits of commercial banks
- M4 = M3 + Total deposits with Post Office savings organisations (excluding National Savings Certificates)
- CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks.
- M1 and M2 are known as narrow money. M3 and M4 are known as broad money.
These gradations are in decreasing order of liquidity i.e.
- M1 is most liquid and easiest for transactions whereas M4 is least liquid of all.
- M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources.
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By: Kamal Kashyap