Question

What are margin requirements? How does a change in margin requirements control the situations of excess demand and deficient demand?

Answer 1

Margin requirement refers to the difference between the current value of security offered for a loan and the value of the 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. Whereas, during deficient demand or deflation, the margin requirement is decreased by the central bank.