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
- A.to reduce it by ₹1,00,000
- B.to increase it by ₹1,00,000
- C.to increase it by more than ₹1,00,000
- D.to leave it unchanged
Correct answer
Explanation
The correct answer is D, to leave it unchanged. Withdrawing cash only changes the form in which the money is held; the total stays the same.
Money supply in India is measured by RBI aggregates such as M1, which is currency held by the public plus demand deposits with banks plus other deposits with RBI; broad money M3 adds time deposits. Both cash in the public's hands and demand deposits are counted. When you take ₹1,00,000 out of your savings or current account, demand deposits fall by ₹1,00,000 and currency with the public rises by exactly the same amount, so M1 and M3 do not change at that moment. Later effects, such as banks having fewer reserves to lend, may follow, but the question asks about the immediate effect.
A is wrong: the fall in deposits is cancelled by the rise in cash held.
B and C are wrong: no new money is created by a withdrawal.
Exam tip: M1 = currency with the public + demand deposits + other deposits with RBI; moving money between cash and deposits leaves M1 unchanged.
Practice Questions
View allWhich one of the following equals Personal Disposable Income ?
- A.Personal Income - Direct taxes paid by households and miscellaneous fees, fines, etc.
- B.Private Income - Saving of Private Corporate Sectors - Corporation Tax
- C.Private Income - Taxes
- D.Total expenditure of Households - Income Tax - Gifts received
Show answer
In national income accounting the steps run from private income to personal income to personal disposable income. Private income is the factor income of the private sector plus transfers.
Read the full explanation →With reference to India, consider the following pairs:
Organization : Union Ministry
I. The National Automotive Board : Ministry of Commerce and Industry
II. The Coir Board : Ministry of Heavy Industries
III. The National Centre for Trade Information : Ministry of Micro, Small and Medium Enterprises
How many of the above pairs are correctly matched?
- A.Only one
- B.Only two
- C.All the three
- D.None
Show answer
Each organisation is paired with the wrong ministry. The National Automotive Board works under the Ministry of Heavy Industries; it supports the automobile sector with testing and certification work and helps run schemes for the industry.
Read the full explanation →If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
- A.1 and 2 only
- B.2 only
- C.1 and 3 only
- D.1, 2 and 3
Show answer
An expansionist policy aims to make money cheaper and more plentiful, so the RBI would not raise the Marginal Standing Facility rate, which makes borrowing dearer.
Read the full explanation →Which of the following is/are the aim/aims of "Digital India" Plan of the Government of India?
1. Formation of India's own Internet companies like China did.
2. Establish a policy framework to encourage overseas multinational corporations that collect Big Data to build their large data centres within our national geographical boundaries.
3. Connect many of our villages to the Internet and bring Wi-Fi to many of our schools, public places and major tourist centres.
Select the correct answer using the code given below:
- A.1 and 2 only
- B.3 only
- C.2 and 3 only
- D.1, 2 and 3
Show answer
Connecting villages to the Internet and offering Wi-Fi in schools and public places is part of Digital India; the other two are not its stated aims.
Read the full explanation →With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?
- A.It is the investment through capital instruments essentially in a listed company.
- B.It is a largely non-debt creating capital flow.
- C.It is the investment which involves debt-servicing.
- D.It is the investment made by foreign institutional investors in the Government securities.
Show answer
FDI comes in as equity ownership, so India does not have to repay it with interest. Under Indian rules, FDI is investment by a person resident outside India in an unlisted company, or in ten per cent or more of the paid-up equity of a listed company.
Read the full explanation →