The default file system is NOT case-sensitive. It is, however, case aware.
So you can save a file called "WONKYdonkey", and it will be saved to the disk as such.
However, you can't save a different file called "wonkyDONKEY" in the same folder. Attempts to do so will overwrite the existing file.
The file system remembers case, but does not distinguish between them.
If you use a case-sensitive file system, then you can have different files in the same folder with the same name, but different case.
One reason for not doing so is that some software doesn't work in case-sensitive file systems -- particularly Adobe software -- because it assumes case-insensitivity.
In short: you should use "Mac OS X, Extended, journalled".