Precautionary Demand

Precautionary demand refers to the demand for money or liquid assets that individuals or businesses hold as a safeguard against unexpected expenses or economic uncertainty. Unlike transactional demand (for regular expenditures) and speculative demand (for investment opportunities), precautionary demand is driven by the desire for financial security in uncertain times. This demand increases during economic downturns or when there is uncertainty about future income.

Example

A family increases their savings during a recession, holding more cash in a precautionary demand to cover unexpected expenses like job loss or medical emergencies.