Question

What is meant by Margin Requirement? How does the Central Bank use this measure to control deflationary conditions in an economy?

Answer 1

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A Margin Requirement is the percentage of marginable securities that an investor must pay for with his/her own cash. An Initial Margin Requirement refers to the percentage of equity required when an investor opens a position.

During deficient demand or deflation, the central bank decreases the margin in order to increase the credit creation capacity of the commercial bank and as a result, the money supply in an economy gets increased and the deficient demand or deflationary gap is combated.

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Answer 2

Explanation:

1) Business and traders get credit from commercial bank against the security of their goods. Bank never gives credit equal to the full value of the security. It always pays less value

than the security.

2) So, the difference between the value of security and value of loan is called marginal requirement.

3) In a situation of deficient demand leading to deflation, central bank decreases marginal requirements. This encourages borrowing because it makes people get more credit against their securities.

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