What is a precautionary demand for money?

The precautionary demand for money is the act of holding real balances of money for use in a contingency. As receipts and payments cannot be perfectly foreseen, people hold precautionary balances to minimize the potential loss arising from a contingency.

What factors affect money demand?

The demand for money is affected by several factors, including the level of income, interest rates, and inflation as well as uncertainty about the future. The way in which these factors affect money demand is usually explained in terms of the three motives for demanding money: the transactions, the precautionary, and the speculative motives.

What is transactions demand for money?

The transactions demand for money is motivated by the need to facilitate daily transactions by consumers, businesses, and governments. The transactions demand for money is one component of the overall demand for money. The other components are the asset or speculative demand and the precautionary demand.

Why do people hold precautionary balances?

As receipts and payments cannot be perfectly foreseen, people hold precautionary balances to minimize the potential loss arising from a contingency. The precautionary demand is dependent on the size of income, the availability of credit, and the rate of interest.