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What is precautionary demand?

Precautionary demand

Precautionary demand describes the demand for financial assets to be held against an unforeseen event. This event can be relatively trivial, such as a professional person facing delays in collecting fees, or very serious, such as war or political upheaval.

Where have you heard about precautionary demand?

You may have read about precautionary demand in an economics textbook or noticed it being mentioned in the more sophisticated financial media. As an investor, you may have heard about precautionary demand from your financial adviser in relation to general financial conditions.

What you need to know about precautionary demand.

Precautionary demand arises from the uncertainty inherent in economic activity and describes the demand for assets that can be used to guard against events that may or may not take place.

These assets can take the form of cash, securities and bullion, although precautionary demand is an expression usually applied to money. This is because precautionary demand is understood to remove money from circulation, thus dampening economic activity.

In times of great uncertainty, such as the aftermath of the financial crisis, governments may respond to an upsurge in precautionary demand by creating more money, through quantitative easing or other means, to maintain economy activity.

Find out more about precautionary demand.

The notion of precautionary demand as a major economic factor is associated with the economist John Maynard Keynes. Learn more about Keynes here.

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