If a depositor withdraws a sum of money in cash from their demand deposit account at a bank, what is the immediate effect on the aggregate money supply in the economy?

Question

Accepted Answer

D. The money supply remains unchanged. Cash withdrawn from a demand deposit account does not create new money, it merely converts one component of the money supply, the demand deposit, into another component, currency held by the public, both of which are already counted within the broader money supply aggregate. Since neither component of that aggregate is added to or removed from the system, only reshuffled between deposits and currency, the total remains unchanged, ruling out any claim of an increase or decrease. Hence option D correctly describes the immediate effect.

Answer

A. The money supply increases, since new currency enters circulation

Answer

B. The money supply decreases, since the bank's ability to lend is reduced

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C. The money supply first decreases and then gradually increases

Answer

D. The money supply remains unchanged