(C) Both Statement I and Statement II are correct.
Demand deposits can be withdrawn on demand, and payments through cheques/drafts using demand deposits are settled directly without physical use of cash.
Source: Money and Credit, Chapter 3
---
Both statements are factually correct. Statement I is correct because the term "demand deposit" itself means the depositor can withdraw the money on demand. Statement II is correct because cheques drawn on demand deposits allow payments to be settled between parties without actual cash changing hands — this is a key feature that makes demand deposits part of the money supply. Examiners expect you to know both properties of demand deposits.