Precautionary demand for money is directly related to
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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.
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The precautionary demand for money is the act of holding real balances of money for use in a contingency. ... A higher rate of interest represents a higher opportunity cost of holding money for any reason, including the precautionary reason, and so leads to lower precautionary holdings.
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