Explain the role margin requirement in dealing problem of excess demand
Answers
Excess Demand The situation of an economy, when Aggregate Demand is more than the Aggregate Supply corresponding to full employment, it is termed as excess demand situation.
Excess demand —> AD > AS, corresponding to full employment level of output or income.
1. Full Employment Equilibrium In an economy, when AS = AD or S = I alongwith fuller utilisation of labour force, the economy is said to be in full employment equilibrium.
2. Under Employment Equilibrium In an economy, when AS = AD or S = I but without the fuller utilisation of labour force, the economy is said to be in under employment equilibrium.
3. Full Employment A situation when all those who are willing to or able to work are getting work, is termed as full employment. Full employment never means zero unemployment in an economy, because there may always exist voluntary unemployment.
4. Voluntary Unemployment It is a kind of unemployment situation, when some people are not willing to work at all, or are not willing to work at the existing wage rate.
5. Involuntary Unemployment It is a situation in the economy, when even if people are willing to work at existing wage rates, they are not getting work.
Answer:
Explanation:
Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation.
During excess demand situation(when AD>y at the level of full employment), the central bank raises the margin requirements so that the borrowers are now given less money in the form of loan against the mortaged assets. Thus, credit gets reduced and AD falls. this helps in reducing the problem of excess demand, which thereby gets checked.