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Question
During excess demand, central bank _____ the margin.
During excess demand, central bank _____ the margin.
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Solution
The correct option is B increases
Margin requirement refers to the difference between the current value of security offered for loan and the value of loan granted. During excess demand or inflation, the central bank increases the margin in order to reduce the credit creation capacity of the commercial bank and as a result, the money supply in an economy gets reduced and the excess demand is combated.
Margin requirement refers to the difference between the current value of security offered for loan and the value of loan granted. During excess demand or inflation, the central bank increases the margin in order to reduce the credit creation capacity of the commercial bank and as a result, the money supply in an economy gets reduced and the excess demand is combated.
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