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This is the amount held to provide for unexpected expenditures. According to Keynes, precautionary demand is determined by an individual income and institutional factors which he considered fixed in the short run. Unlike in the classical approach, there exists uncertainty in the Keynesian model, hence the need for precautionary money balances. The precautionary motive arises from the need to provide for contingencies that require sudden expenditure and for unforeseen opportunities. Just like the transactions demand for money, precautionary demand for money is interest elastic.
Dana05 answered the question on August 14, 2019 at 07:19
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