CBSE Class 12-commerce Answered

Both households and business firms hold some amount of money in excess of their transaction demand to provide for unforeseen contingencies such as sickness, fire, theft, loss of job, death of an earning member, accident and unexpected market condition. The money held for this motive is called precautionary demand for money. It is closely related to the level of income. The higher the level of income, the higher the demand for money for precautionary motive.