How is income related to precautionary demand for money?

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Solution

Income and precautionary demand for money are positively related. As the income of an individual is greater, there can be higher, unanticipated expenditures. So people with higher incomes generally have greater precautionary demand for money.

On the other hand, expenditures are likely to remain low and predictable when the income is low. So precautionary demand will also remain low.

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