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Precautionary Demand for Money

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Precautionary Demand for Money
In Keynesian economics, a need for money resulting from an unforeseen situation. Medical bills following an accident are an example of precautionary demand. According to John Maynard Keynes, people keep savings accounts, as well as some stocks and commodities, in order to cover precautionary demand if and when it occurs.


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Second, consumer good shortages (quantity constraints) should affect the transaction and the precautionary demand for money.
In other words, this "M1 problem" is simply a result of the fact that an increase in the precautionary demand for money can be satisfied by either an increase in demand for M1 or an increase in demand for NM1M2 (and perhaps NM1M3).
 
 
 
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