Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________.

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BlackTom AI · Accepted Answer

The question asks about Keynes's view of the precautionary component of the demand for money and how it is determined.
In Keynesian theory, the precautionary demand for money is tied to the level of transactions that individuals anticipate needing to conduct. He held that people hold money in order to accommodate transaction needs, and these transaction needs are themselves proportional to income. Therefore, the standard pairing is that precautionary money demand is driven by the level of people’s transactions, which Keynes argued are proportional to income.
Since the provided answer indicates that the correct pairing is 'transactions; income,' we can reason why this pairing makes sense conceptually: higher income leads to more transactions, which increases the amount of money people wish to hold for precautionary purposes. The key idea is that as income grows, people engage in more spending and need a larger cash buffer to cover those transactions, hence a precautionary motive linked to income.
If we consider potential distractors (had they been provided), common misconceptions might include treating precautionary money demand as primarily influenced by interest rates, by speculative motives, or by an abstract notion of 'wealth' rather than actual transactional needs. These would mischaracterize Keynes’s emphasis on transaction-related liquidity needs and the proportional relationship to income.
In summary, the core concept is that the precautionary component of money demand is driven by the level of transactions, which Keynes connected to income, reflecting the need to hold liquid assets to finance anticipated expenditures.

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Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's , which he believed were proportional to .

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