Economics of Money, Banking and Financial Markets, The, Business School Edition (5th Edition) (What's New in Economics)
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Chapter 22, Problem 11Q
To determine

In case the question requires us to explain the precautionary demand for money in a country.

Concept Introduction:

Precautionary demand: Precautionary demand is the demand for liquid money to cover unanticipated expenses such as an accident or health emergency. This money which is kept for the contingencies is the ‘Idle balance’. People with high incomes can afford to keep more liquid money for unforeseen emergencies. Thus Precautionary demand for money is also an increasing function of income level.

Liquidity: describe as how quickly an asset can be converted into cash. If you keep the money in some other form of asset, or in bank, you will actually have a separation with the liquid form. Liquidity is the easiness of holding cash form of money rather than any other form. Interest rate is considered as the compensation for separation with the liquidity form of money.

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