If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate ef

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

Accepted Answer

There are 4 concepts of money supply: M1, M2, M3, and M4.  M1 = C + DD + OD C - Is the currency held by the public. (Public money means that money which is held by everybody other than the government and the banks. It includes companies, general organizations, households. It does not include inter-bank or government deposits in banks.)  DD - Means net demand deposits with banks. 'Net' here indicates the deposits of only the public in banks.  OD - Means other deposits. These are the deposits with the RBI, held by certain individuals and institutions, such as former governors of the RBI and institutions like IMF deposits. M3 = M1 + TD = C + DD + OD + TD (Broad money)  'TD' means time deposits. M3 shows the total purchasing power in the economy. Therefore, when we say money supply in general, it means M3. So, normally, in newspapers, etc., when the word money supply is used, it means M3 (Sometimes, M1 is also used- meaning 100% liquid money- but overall purchasing power is shown by M3.)  Now, in the given case, while the DD component will fall by Rs. 1,00,000, the C component will increase by Rs. 1,00,000, thereby, leaving the money supply unchanged. Hence option (d) is the correct answer.Source: NCERT