Correct Option
The correct option is Cheques drawn on them are used to settle transactions.
Explanation
Money is primarily defined by its function as a medium of exchange. In the modern banking system, demand deposits (such as savings and current accounts) are funds held at a bank that can be withdrawn at any time ("on demand") by the depositor. Their classification as money stems from their liquidity and usability in transactions.
Option Analysis
- They earn a high rate of The definition of money is not based on the interest rate it earns. In fact, currency (cash) earns zero interest, and current account demand deposits also typically earn zero interest.
- They are issued by the Reserve Bank of India. is incorrect: Demand deposits are liabilities of commercial banks, not the Reserve Bank of India (RBI). The RBI issues currency (notes), while commercial banks create demand deposits through the fractional reserve system.
- Cheques drawn on them are used to settle transactions. is correct: Demand deposits are considered money because they serve as a medium of exchange. The facility of cheques (or digital transfers) drawn on these deposits allows them to be used directly to settle transactions, functioning effectively like cash in the economy. In monetary aggregates (like M1), demand deposits are included alongside currency held by the public.
- They are legal tender and cannot be refused. is incorrect: Demand deposits are not "legal tender." Legal tender refers to currency (coins and notes) that, by law, cannot be refused in the settlement of a debt. Cheques drawn on demand deposits can be refused by a payee; therefore, they are often classified as "fiduciary money" or "optional money," not legal tender.
Key Takeaway: Demand deposits are considered money because they facilitate the settlement of transactions through instruments like cheques, acting as a medium of exchange, even though they are not legal tender.