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 prompt presents a Keynesian idea about the precautionary component of money demand and asks us to evaluate a statement about what determines it.
First, the core concept: in Keynesian liquidity preference, the precautionary demand for money is tied to the need to hold money for unforeseen transactions and contingencies. This precautionary demand tends to rise with the scale of ordinary transactions people engage in and, importantly, with income, since higher income generally implies higher potential transactions and greater precautionary holdings.
In the given statement, the key claim is that the precautionary component is primarily determined by the level of people's transactions, which Keynes argued were proportional to income. This captures the standard intuition: more transactions require more liquidity buffers, and since transaction volume tends to grow with income, precautionary money demand increases with income as a proportional relationship.
However, there are no answer options provided to analyze individually. Without the list of alternatives, we cannot assess why each alternative would be correct or incorrect, compare nuances, or identify common misinterpretations (for example, whether some options might emphasize speculative motives, interest rate sensitivity, or a mischaracterization of “primary” determinants).
Given the absence of the alternative choices, the discussion centers on the content of the statement itself and its alignment with Keynesian theory: precautionary money demand is tied to the expected level of transactions and rises with income due to a larger base of potential transactions and a desire to buffer against uncertainties in the future. This framing is consistent with the conventional Keynesian explanation of why money demand is a rising function of income, reflecting the precautionary motive as a subset of the overall speculative and transactional motives.
If you provide the missing answer options, I can break down each one, explain why the correct option matches Keynesian theory, and precisely show why the incorrect options fail to capture the standard reasoning.

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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