Precautionary demand

Precautionary demand is the demand for financial assets, such as securities, money or foreign currency; it is money people want in case of emergency.

In economic theory, specifically Keynesian economics, Precautionary demand is one of the determinants of demand for money (and credit), the others being transactions demand and speculative demand. Precautionary demand for money refers to real balances for the use in contingency.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 depended on the size of income and the availability of credit. With more income the precautionary demand will increase with the size of income. However, with more income, credit is more available to high income group. therefore, precautionary demand is assumed to be positively related to income.