Which type of deposits may serve as a medium of exchange ?

Question

Accepted Answer

The correct option is 2:

Demand Deposits are the type of bank deposits that function as a medium of exchange because they are withdrawable by the customer on demand, without any prior notice to the bank. Crucially, the bank allows customers to issue cheques against these deposits, which is the primary mechanism through which they are used to make payments and settle transactions in the modern economy, thus fulfilling the defining characteristic of a medium of exchange (money). These deposits are highly liquid and form a major component of the money supply (M1 or Narrow Money), making them readily acceptable for the purchase of goods and services.

The incorrect option is 1:

Time Deposits, which include fixed deposits and recurring deposits, are characterized by a fixed maturity period. They cannot be withdrawn instantly by cheque or on demand without incurring a penalty, meaning they lack the necessary liquidity to function as a medium of exchange.

The incorrect option is 3:

Fixed Deposits (FDs) are a form of Time Deposit. Like other time deposits, FDs are held for a predetermined period and serve primarily as a store of value, not a medium of exchange, as they require premature withdrawal penalties and cannot be directly transferred via instruments like cheques.

The incorrect option is 4:

Since Time Deposits and Fixed Deposits do not possess the characteristic of instant withdrawal via cheque, they cannot serve as a medium of exchange. Therefore, the option "All of the above" is incorrect.