Final answer:
Demand deposits are considered money because they can be used directly for transactions, such as making purchases and paying off debts. They are part of the M1 money supply, which includes the most liquid forms of money. Banks must ensure they have enough reserves to meet the demand for these deposits.
Step-by-step explanation:
Demand deposits are classified as money because c. they can be readily used in the making of purchases and payment of debts. Demand deposits include deposits placed into banks that a bank must return to the account holder on demand, such as checking accounts. These are essential because they provide the liquidity necessary for daily transactions. When we hold money in checking accounts, we expect to be able to use those funds to make purchases or pay off debts whenever needed.
The M1 money supply comprises the total coins and currency in circulation, not held by the U.S. Treasury, Federal Reserve Bank, or in bank vaults, as well as checkable deposits. These checkable deposits are closely related to currency and are known as demand deposits. The M1 money supply is important because it is a measure of the most liquid forms of money in the economy. Banking institutions must give deposit holders their money "on demand" via checks or debit cards, which is why they are included in the M1 definition of money.
When banks make loans that are deposited into demand deposit accounts, they effectively increase the M1 money supply. However, banks must also hold enough money in reserves to meet their liabilities, ensuring they can satisfy customer demands when they arise.