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Small time deposits and NOW accounts (part of checkable deposits) are both interest-bearing bank deposits. But...

Small time deposits and NOW accounts (part of checkable deposits) are both interest-bearing bank deposits. But NOW accounts have checkable privileges and can be withdrawn any time, while small time deposits have no checkable privileges and can’t be withdrawn before maturity without penalty. Then why would anyone have small time deposit? Provide the fundamental economic concept behind this argument.

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Answer #1

While both are interest bearing, the rate of interest on NOW is much lower than on the time deposits. This differential (or higher) rate of interest works as an incentive for the depositors of time deposits. We can also say that the additional interest works as a compensation to the depositors for deferring their consumption (which they would do if they didn't keep their money in a deposit account), as consumption today is more valuable (or satisfying or having higher utility) than in future.

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