(a) What is meant by repo rate? How does the Central Bank use this measure to control inflationary conditions in an economy?
(b) What is meant by margin requirements? How does the Central Bank use this measure to control deflationary conditions in an economy?
(a) What is meant by repo rate? How does the Central Bank use this measure to control inflationary conditions in an economy?
(b) What is meant by margin requirements? How does the Central Bank use this measure to control deflationary conditions in an economy?
(a) Repo rate is the rate of interest at which the Central Bank lends money to the commercial banks.
To correct the inflationary situation, repo rate is increased. As a follow-up action, the commercial banks raise the market rate of interest (the rate at which the commercial banks lend money to the consumers and the investors). This reduces demand for credit. Consequently, consumption expenditure and investment expenditure are reduced, implying a reduction in aggregate demand, as required, to correct inflationary situations.
(b) Margin requirement refers to minimum down payment that the borrowers have to make as a percentage of their total borrowings from the commercial banks.
To correct the deflationary situation, margin requirement is reduced. A lower margin requirement acts as an incentive to borrow. This induces borrowers to seek more credit. This implyies a rise in aggregate demand, as desired, to correct a deflationary situation.
(a) Repo rate is the rate of interest at which the Central Bank lends money to the commercial banks.
To correct the inflationary situation, repo rate is increased. As a follow-up action, the commercial banks raise the market rate of interest (the rate at which the commercial banks lend money to the consumers and the investors). This reduces demand for credit. Consequently, consumption expenditure and investment expenditure are reduced, implying a reduction in aggregate demand, as required, to correct inflationary situations.
(b) Margin requirement refers to minimum down payment that the borrowers have to make as a percentage of their total borrowings from the commercial banks.
To correct the deflationary situation, margin requirement is reduced. A lower margin requirement acts as an incentive to borrow. This induces borrowers to seek more credit. This implyies a rise in aggregate demand, as desired, to correct a deflationary situation.
