Cash Withdrawal and Its Impact on Money Supply

Subject: Finance
Pages: 2
Words: 291
Reading time:
< 1 min

Withdrawal of cash from the checking account will reduce the bank’s deposit and will also affect the supply of money by the deposit multiplier, which is the ratio of “the change in checking deposit to the change in reserves of the bank.” The withdrawal from the checking account will affect the M1 money supply, which is the sum of highly liquid monies, including cash, deposits in checking accounts, and traveler’s checks. It implies that when cash is withdrawn from the checking account, it reduces the M1 supply.

Any amount deposited in the banking system creates the money supply, or any withdrawal declines it. The level of money supply affects the monetary policy of the reserve bank. When there is cash withdrawal from the banking system, then the reserve bank attempts to control this situation by increasing the interest rate. It becomes unfavorable to withdraw funds from bank accounts as customers will keep their funds in banks to earn higher interest income rather than using them to buy products or services or keeping them in the form of cash outside the banking system.

Excess reserve refers to the additional amount of cash held by the bank, which is loaned out to its customers. It means that this amount is over the minimum reserve requirement set by the central bank. The withdrawal from the checking account will have a negative effect on the excess reserve. The balance of checking accounts is referred to as a demand deposit and is available to users when they require to withdraw. Therefore, the withdrawal from the checking account implies that the bank will have a lower amount in its excess reserve to give loans to its customers.