Keynes hypothesized that the precautionary component of money demand was primarily determined by the level of
A)interest rates.
B)velocity.
C)income.
D)stock market prices.

Question

Quizplus · Accepted Answer

Keynes argued that the demand for money is determined by three motives: transaction, speculative, and precautionary. The precautionary demand for money arises from a desire to hold cash in case of unexpected events such as illness, accidents, or loss of job. Since these events are often correlated with changes in income, the level of income is the most important factor influencing the precautionary demand for money. The interest rates affect the speculative demand for money, while velocity depends on both the level of income and interest rates. Stock market prices may affect the speculative demand for money, but not the precautionary demand.

Keynes Hypothesized That the Precautionary Component of Money Demand Was