Demand deposits are deposits in banks that can be withdrawn on demand at any time. They function as money because payments can be made directly through cheques (instead of cash), without physically moving currency. Thus, demand deposits — along with currency — form the modern stock of money and act as a medium of exchange.
Source: Money and Credit, Chapter 3
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The examiner expects two key points: (1) what demand deposits are (withdrawable on demand), and (2) why they are considered money — because payments can be made via cheques, making them equivalent to currency. Avoid writing about bank loans here; focus only on the medium-of-exchange function. Mention "cheque" specifically, as it is the mechanism that makes demand deposits function as money.