Read the following statements and choose the best alternative:
(i) When Ram deposit currency in a commercial bank cash goes out of circulation and the money supply declines.
(ii) If the RBI creates more money, Indians would achieve a higher standard of living.

Question

Read the following statements and choose the best alternative: 
(i) When Ram deposit currency in a commercial bank cash goes out of circulation and the money supply declines. 
(ii) If the RBI creates more money, Indians would achieve a higher standard of living.

Accepted Answer

The correct option is 2:

**(i) When Ram deposit currency in a commercial bank cash goes out of circulation and the money supply declines.**

This statement is false. When Ram deposits cash (currency) into a commercial bank, the currency component of the money supply (C) decreases, but the demand deposits component (DD) increases by the same amount. The money supply (M1 = C + DD) remains unchanged immediately after the deposit. Furthermore, this initial deposit forms the basis for the commercial bank to create credit (money multiplier process), potentially leading to an *increase* in the overall money supply as the money multiplier effect takes place. Therefore, the action of depositing money does not, by itself, cause the money supply to decline.

**(ii) If the RBI creates more money, Indians would achieve a higher standard of living.**

This statement is also false. While creating more money (increasing the money supply) can stimulate economic activity in the short run, it does not guarantee a higher standard of living. Standard of living is determined by the production of goods and services (real output) per person, not just the nominal amount of money in circulation. If money supply increases without a corresponding increase in real output, the result is inflation, which erodes the purchasing power of the existing money and can actually *lower* the standard of living, especially for those on fixed incomes. Sustained growth in standard of living requires real economic growth and enhanced productive capacity, not merely printing more currency.

The incorrect option is 1: (i) and (ii) are true
This option is incorrect because, as explained above, both statement (i) and statement (ii) are false based on fundamental macroeconomic principles. Depositing cash converts one form of money (currency) into another (demand deposits), thus not reducing the total money supply. Furthermore, an increase in money supply by the RBI does not automatically translate to a higher standard of living; this requires real growth.

The incorrect option is 3: (i) is true and (ii) is false
This option is incorrect because statement (i) is false. The initial deposit only changes the composition of the money supply (from currency to demand deposits); it does not reduce the overall money supply. Statement (ii) is correctly identified as false, but since (i) is also false, this choice is incorrect.

The incorrect option is 4: (i) is false and (ii) is true
This option is incorrect because statement (ii) is false. Increasing the money supply (by RBI) without corresponding real output growth generally leads to inflation, which undermines the purchasing power of money and does not necessarily improve the standard of living. While statement (i) is correctly identified as false, the classification of statement (ii) as true makes this entire option incorrect.