Precautionary demand for money financial definition of precautionary demand for money
precautionary demand for money
Precautionary Demand for Money
precautionary demand for money the demand for MONEY balances that are held to cover for unforeseen contingencies, for example, loss of earnings resulting from illness. The amount of money held for such purposes is broadly dependent on the level of INCOME and expenditure. The precautionary demand for money, together
with the TRANSACTIONS DEMAND FOR MONEY (that is, money held on a day-to-day basis to finance current expenditures on goods and services) and the SPECULATIVE DEMAND FOR MONEY (that is, money held to purchase BONDS in anticipation of a fall in their price) constitute the MONEY DEMAND SCHEDULE.
See LIQUIDITY PREFERENCE, L-M SCHEDULE.
References in periodicals archive
Precautionary demand for money
comes from holding an asset in anticipation of some contingency.
Secondly, the precautionary demand for money
which is held for sudden expenditures and unforeseen circumstances is also a positive function of the level of income.
"On Transaction and Precautionary Demand for Money
." Quarterly Journal of Economics, August 1980, 25-43.
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).