UPSC Prelims 2020— Question 10

This question tests demand deposits and money supply. The key concept is: A withdrawal of cash from a demand-deposit account changes the composition of money held by the public but, at the immediate moment of withdrawal, does not by itself change the aggregate money stock. Currency replaces an equivalent demand deposit in the holder's portfolio. The verified answer for the uploaded Set-B paper is option D. Option A — to reduce it by Rs. 1,00,000: This is not the correct option. The option does not match the verified combination or conclusion. The decisive point is the distinction explained above: A withdrawal of cash from a demand-deposit account changes the composition of money held by the public but, at the immediate moment of withdrawal, does not by itself change the aggregate money stock. Currency replaces an equivalent demand deposit in the holder's portfolio. Therefore this alternative should be eliminated even if part of its wording appears plausible in isolation. Option B — to increase it by Rs. 1,00,000: This is not the correct option. The option does not match the verified combination or conclusion. The decisive point is the distinction explained above: A withdrawal of cash from a demand-deposit account changes the composition of money held by the public but, at the immediate moment of withdrawal, does not by itself change the aggregate money stock. Currency replaces an equivalent demand deposit in the holder's portfolio. Therefore this alternative should be eliminated even if part of its wording appears plausible in isolation. Option C — to increase it by more than Rs. 1,00,000: This is not the correct option. The option does not match the verified combination or conclusion. The decisive point is the distinction explained above: A withdrawal of cash from a demand-deposit account changes the composition of money held by the public but, at the immediate moment of withdrawal, does not by itself change the aggregate money stock. Currency replaces an equivalent demand deposit in the holder's portfolio. Therefore this alternative should be eliminated even if part of its wording appears plausible in isolation. Option D — to leave it unchanged: This is the correct option. It matches the verified conclusion because A withdrawal of cash from a demand-deposit account changes the composition of money held by the public but, at the immediate moment of withdrawal, does not by itself change the aggregate money stock. Currency replaces an equivalent demand deposit in the holder's portfolio. The wording of the option is consistent with the governing concept tested by the question. For UPSC-style elimination, first identify the exact proposition being tested, then evaluate each statement independently before comparing the answer codes. Avoid treating a broad or absolute statement as correct merely because its general theme is familiar. The precise qualifiers in the question—such as 'all', 'only', 'cannot', 'largest', 'always' or a specific institutional role—often determine the answer. On that basis, option D is the verified answer.