What it is:
A demand deposit is an account with a bank or other financial institution that allows the depositor to withdraw his or her from the account without warning or with less than seven days' notice. Demand deposits are a key component of the M1 supply calculated by the Federal Reserve.
How it works (Example):
Checking accounts are an example of demand deposits. They allow the depositor to withdraw at any time, and there is no limit to the number of transactions a depositor can conduct with these accounts (although a bank may charge a fee for each transaction).
Unlike other types of retail financial accounts, Federal Reserve Regulation Q prohibits banks and financial institutions from paying interest on demand deposits. However, merchandise, credit and cash payments to a depositor are allowed if they are paid when the depositor opens the account, the institution does not give the depositor more than two payments a year, and the value of each is not more than $10 for deposits of less than $5,000 and $20 for deposits of more than $5,000.
Why it Matters:
Demand deposits are important to consumers because they often house the to pay day-to-day expenses. Without the ability to obtain on demand, depositors would not be able to make any purchases without first telling the bank.
The amount of demand deposits an institution has often dictates all or part of the reserves it must keep on hand either in vault deposit with the Federal Reserve; the more dollars an institution has in demand deposits, the more dollars it must keep in reserves.or on