1
Question
Explain the concept of 'deflationary gap'. Also explain the role of 'margin requirements' in reducing it.
Open in App
Solution
In the diagram, AB represents the deflationary gap or deficient demand.
Deficient demand refers to the situation when aggregate demand is short
of aggregate supply corresponding.Margin requirement refers to the difference between the current value of
security offered for loan and the value of loan granted. 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.
In the diagram, AB represents the deflationary gap or deficient demand.
Deficient demand refers to the situation when aggregate demand is short
of aggregate supply corresponding.
Margin requirement refers to the difference between the current value of
security offered for loan and the value of loan granted. 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.
Suggest Corrections
0
Similar questions
View More
Join BYJU'S Learning Program
Explore more
Join BYJU'S Learning Program
