Demand Deposits

View FREE Lessons!

Definition of Demand Deposits:

Demand deposits are payable by the bank on demand.  Checking accounts are the most common example of demand deposits.

Detailed Explanation:

Access to deposits is the most important characteristic in distinguishing demand deposits from savings deposits. Demand deposits have unlimited immediate access. The number of withdrawals is not limited and can be made at any time without penalty or prior notification. Most financial institutions provide their customers many ways to conveniently access their deposits: withdrawing money at the bank, writing a check, at an ATM, use of a debit card, or on-line banking. Many financial institutions pay interest on demand deposits. However, the interest rate is very low.

Demand deposits are included in M1, the narrowest definition of money. M1 only includes currency, demand deposits, and traveler’s checks.

Pie Chart showing demand deposits
Data Source: Federal Reserve

In contrast, savings and time deposit accounts are not demand deposits because they have restrictions. For example, certificates of deposit lose interest if they are cashed prematurely. Money market accounts may restrict the number of transactions and / or require a minimum check amount. Depositors may be required to give advance notice when withdrawing funds. Demand deposits and these savings accounts are included in M2, an expanded definition of money.

Pie Chart showing breakdown of deposits
Data Source: Federal Reserve

Banks may provide checks to customers to access a line of credit. This type of account is a loan and is not considered a demand deposit even though immediate access to cash is available by writing a check. 

Dig Deeper With These Free Lessons:

Opportunity Costs - The Cost of Every Decision
Monetary Policy - The Power of an Interest Rate

Search the Glossary


Market Overview:

Market quotes are powered by TradingView.com

Single Quote:

© 2018 Higher Rock Education and Learning, Inc. All rights reserved. No portion of this site may be copied or distributed by any means, including electronic distribution without the express written consent of Higher Rock Education and Learning, Inc.