If you withdraw ₹ 1,00,000 in cash from your Demand Deposit Account at

by

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
This question was previously asked in
UPSC IAS – 2020
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Money supply (specifically M1) is defined as the sum of currency in circulation (C) and demand deposits (DD) held by the public. When you withdraw ₹1,00,000 in cash from your demand deposit account, there is a decrease in the demand deposits component by ₹1,00,000 and a corresponding increase in the currency in circulation component by ₹1,00,000.
The total amount of money defined as M1 (Currency + Demand Deposits) remains unchanged; only the form in which the money is held by the public changes from demand deposits to physical currency.
The transaction is a transfer of funds between two components of the money supply (M1). If the definition of money supply included broader measures like M2, M3 etc., which include time deposits or other assets, the effect might be different depending on the nature of the withdrawal account and what the money is subsequently used for (e.g., if it shifts into a different asset type). However, in the context of a simple cash withdrawal from a demand deposit account affecting aggregate money supply (M1), the net effect is zero.

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