Precautionary Money Demand in the Economy’s Demand Curve and in the Fiscal and Monetary Multipliers: An Extension

This paper examines, through a modified aggregate demand curve, the reduction in equilibrium income caused by the presence of precautionary demand in the money demand function. Specifically, this paper rigorously analyses the transformation of the well-known fiscal and monetary policy multipliers, β and γ, commonly found in macroeconomic theory textbooks. Ceteris paribus, an increase (decrease) in precautionary money demand reduces (increases) equilibrium income, as can be seen through the modified multipliers β and γ. Multiple contingencies that emerged suddenly between 2008 and 2023 may have altered agents’ perceptions regarding precautionary money demand. This work contributes to the adaptation of some well-established tools of macroeconomic theory to address events of this nature.