Q1. [1] medium thorough-understanding
Which of the following BEST explains why demand deposits are considered money?
(A) They earn interest, making them more valuable than cash.
(B) They can be withdrawn on demand and used to settle payments directly through cheques.
(C) They are issued by the Reserve Bank of India, giving them legal status.
(D) They are backed by gold reserves held by the government.
- A They earn interest, making them more valuable than cash.
- B They can be withdrawn on demand and used to settle payments directly through cheques.
- C They are issued by the Reserve Bank of India, giving them legal status.
- D They are backed by gold reserves held by the government.
Generated by claude-sonnet-4-6 · 2026-06-26 13:23 · grounding rag
Model Answer
(B) They can be withdrawn on demand and used to settle payments directly through cheques.
Explanation
The textbook explicitly states: "The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash" — this is what gives demand deposits the essential characteristic of money (medium of exchange). Options C and D are factually wrong (demand deposits are held by commercial banks, not RBI, and are not gold-backed). Option A is a benefit but not the reason they are money.