Demand deposits are funds in checking accounts that account holders can withdraw at any time without notice. In AP Macro, they count as one of the most liquid forms of money (along with cash) and serve as the raw material banks lend out under fractional reserve banking to expand the money supply.
Demand deposits are the money sitting in checking accounts. They're called "demand" deposits because you can demand them back at any moment, no waiting period, no penalty. The CED lists them alongside cash as the most liquid forms of money (EK MEA-3.A.1), meaning they can be spent immediately at full value.
Here's the part that makes them more than a vocab word. To you, your checking account is an asset. To the bank, it's a liability, because the bank owes you that money on demand. Banks don't keep all of it in the vault. Under fractional reserve banking, they hold a fraction as reserves and lend out the rest as excess reserves. That lending is how the banking system creates new money. So demand deposits are simultaneously the most spendable form of money you hold and the base banks build new money on top of.
Demand deposits live in Unit 4 (Financial Sector) and show up in three topics at once. In Topic 4.1, they anchor the liquidity discussion under AP Macro 4.1.A, where money's defining attribute is that cash and demand deposits are the most liquid assets you can hold. In Topic 4.4, they're the engine of money creation under AP Macro 4.4.A and 4.4.B. A new demand deposit gets split into required reserves and excess reserves, and those excess reserves fuel the money multiplier process. In Topic 4.7, the saving behavior that puts funds into banks connects to the supply of loanable funds (AP Macro 4.7.E). If you can't explain what happens when money moves between currency and demand deposits, the whole Unit 4 money-creation story falls apart.
Keep studying AP Macroeconomics Unit 4
Money Multiplier (Unit 4)
The multiplier only works on money that's deposited. A $1,000 demand deposit with a 10% reserve requirement can support up to $10,000 in total money supply, but a $1,000 bill stuffed under a mattress supports exactly $1,000. When people shift from deposits to currency, the effective multiplier shrinks.
Bank Balance Sheets (Unit 4)
On a balance sheet (AP Macro 4.4.C), demand deposits go on the liability side because the bank owes that money back to depositors. Reserves and loans go on the asset side. Exam balance-sheet problems almost always start with a new demand deposit and ask what the bank can lend.
Liquidity and Financial Assets (Unit 4)
Demand deposits sit at the top of the liquidity ladder with cash. Holding them costs you the interest you could've earned on bonds, which is the opportunity cost of holding money from Topic 4.1. That trade-off between spendability and return is the whole point of EK MEA-3.A.4.
Supply of Loanable Funds (Unit 4)
When households save by depositing money in banks, those funds become available for banks to lend. Changes in saving behavior shift the supply of loanable funds (AP Macro 4.7.E), so deposits are one bridge between household decisions and the equilibrium real interest rate.
Demand deposits show up most often in multiple-choice questions about the money multiplier and money creation. A classic stem gives you a required reserve ratio (say, 8%) and tells you households shift from demand deposits to currency, then asks what happens to the money multiplier. The answer hinges on knowing that only deposited money gets multiplied through lending. Another common angle tests interpretation, like recognizing that a rising currency-to-deposit ratio signals falling confidence in banks or a flight to liquidity during a crisis. On FRQs, demand deposits appear inside balance-sheet problems where you calculate required reserves, excess reserves, and the maximum change in the money supply from a new deposit. Know the formulas cold, and remember the multiplier applies to excess reserves for new money creation.
Both are part of the money supply and both are maximally liquid, but they behave very differently in the banking system. Currency in your wallet sits outside banks and can't be lent out, so it doesn't get multiplied. Demand deposits sit inside banks, where the portion beyond required reserves becomes excess reserves that fuel money creation. That's why a shift from deposits to currency shrinks the money multiplier even though total money holdings haven't changed yet.
Demand deposits are checking-account funds that can be withdrawn at any time, and the CED classifies them with cash as the most liquid forms of money.
Demand deposits are assets to the account holder but liabilities on the bank's balance sheet, because the bank owes that money on demand.
Under fractional reserve banking, a new demand deposit is split into required reserves and excess reserves, and the excess reserves are what banks lend to expand the money supply.
When people shift from demand deposits to holding currency, the money multiplier shrinks because cash outside the banking system can't be lent out.
A rising currency-to-deposit ratio on the exam usually signals declining confidence in banks, like during a financial crisis.
The opportunity cost of holding money in cash or demand deposits is the interest you give up by not holding bonds or other interest-bearing assets.
Demand deposits are funds in checking accounts that you can withdraw at any time without advance notice. AP Macro treats them as one of the most liquid forms of money, alongside cash, and as the starting point for money creation through fractional reserve banking.
Yes. Demand deposits count as money because they're immediately spendable, just like cash. The CED's Topic 4.1 lists cash and demand deposits together as the most liquid forms of money.
They're a liability. The bank owes that money to depositors on demand, so deposits go on the liability side of the balance sheet, while the bank's reserves and loans go on the asset side. Mixing this up is one of the most common balance-sheet errors on FRQs.
Both are highly liquid money, but only demand deposits sit inside banks where they can be partially lent out and multiplied. Currency held outside banks doesn't generate new loans, which is why a shift from deposits to cash lowers the money multiplier.
The multiplier falls. With an 8% reserve requirement, the maximum multiplier is 12.5, but that assumes all money stays deposited and gets re-lent. Cash held outside banks leaks out of the lending cycle, so more currency holding means less money creation per dollar.
Connect this key term to the AP exam workflow: review the course, practice questions, and check related study tools.
Review units, study guides, and course resources.
Check this vocabulary in multiple-choice context.
Apply key concepts in written AP responses.
Estimate the exam score you are working toward.
Review the highest-yield facts before practice.
Put the full course together before test day.