Demand Deposits

Lesson

Demand deposits are insured deposits that allow the depositor to withdraw funds without prior notice. These deposits are typically held in bank and financial institutions' checking accounts. They are considered highly liquid and are often used for day-to-day transactions.

Practice Question #1

Which of the following is NOT a characteristic of demand deposits?

A) Insured by the FDIC

B) Requires a fixed term

C) Can be withdrawn without prior notice

D) Held in checking accounts

Select an option above to see an explanation here.

A) The FDIC insures demand deposits. B) Unlike time deposits, demand deposits do not require a fixed term. C) Demand deposits can be withdrawn without prior notice. D) Demand deposits are typically held in checking accounts.

Terms

Demand deposit:: A deposit in a bank account can be withdrawn on demand without prior notice.
Insured deposit:: A deposit protected by deposit insurance, such as the FDIC in the United States.
FDIC:: The Federal Deposit Insurance Corporation insures deposits in banks and thrift institutions in the United States.
Deposit insurance:: A protection provided to depositors if a bank fails, ensuring they do not lose their deposits.

Practice Question #2

What is the primary difference between a demand deposit and a time deposit?

A) Demand deposits earn interest, while time deposits do not.

B) Time deposits can be withdrawn without prior notice, while demand deposits cannot.

C) Demand deposits have a fixed term, while time deposits do not.

D) Time deposits have a fixed term, while demand deposits can be withdrawn without prior notice.

Select an option above to see an explanation here.

A) Both demand deposits and time deposits can earn interest. B) Time deposits cannot be withdrawn without prior notice, while demand deposits can. C) Unlike time deposits, demand deposits do not have a fixed term. D) Time deposits have a fixed term, while demand deposits can be withdrawn without prior notice.

Do Not Confuse With

Certificate of deposit (CD):: A time deposit with a fixed term and interest rate typically cannot be withdrawn before the maturity date without incurring a penalty.

Practice Question #3

Which type of bank account is most commonly associated with demand deposits?

A) Savings account

B) Money market account

C) Checking account

D) Certificate of deposit

Select an option above to see an explanation here.

A) Savings accounts are not typically associated with demand deposits, as they have more withdrawal restrictions. B) Money market accounts are not typically associated with demand deposits, as they have more withdrawal restrictions and higher interest rates. C) Checking accounts are most commonly associated with demand deposits, as they allow easy access to funds. D) Certificates of deposit are not associated with demand deposits, as they have a fixed term and cannot be withdrawn before the maturity date without incurring a penalty.

Historical Example

In the early 20th century, demand deposits were a significant part of the money supply, and their rapid growth contributed to the financial instability that led to the Great Depression. The introduction of deposit insurance in the 1930s helped to restore confidence in the banking system and reduce the risk of bank runs.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A small business owner opens a checking account at a local bank to manage their daily expenses and deposits. They can easily access their funds through checks, debit cards, and electronic transfers, making it convenient for them to pay their suppliers and employees.