The correct option is 2 and 3 only.
Explanation
In the banking system, deposits are broadly classified into demand deposits and time deposits based on their withdrawal terms. Demand deposits constitute a crucial component of the money supply (M1) due to their high liquidity.
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Statement 1 is Incorrect:
Demand deposits are funds held in bank accounts that can be withdrawn at any time ("on demand") by the depositor without prior notice. Examples include savings accounts and current accounts. In contrast, fixed deposits (or time deposits) are funds deposited for a specific period and cannot be withdrawn before maturity without incurring a penalty. Therefore, demand deposits are distinct from fixed deposits.
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Statement 2 is Correct:
Demand deposits share the essential features of money because they are widely accepted as a means of payment. In modern economies, the balance in demand deposits is treated as money because it serves as a medium of exchange, allowing transactions to occur seamlessly alongside currency (cash).
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Statement 3 is Correct:
A defining characteristic of demand deposits is the facility to issue cheques. A cheque is a paper instruction to the bank to pay a specific amount from the person's account to the person in whose name the cheque has been issued. This mechanism allows for the settlement of payments without the direct use of physical cash, facilitating trade and commerce.
Key Takeaway:
Demand deposits are liquid assets withdrawable on demand and act as money in the modern economy because they facilitate non-cash payments through instruments like cheques.