Question

What is 'deficient demand' ? Explain the role of 'Margin Requirements' in removing this gap.

Answer 1

Deficit demand refers to a situation where the actual or equilibrium level of demand for output $\left(A{D}_E\right)$ is less than the full employment level of output $\left(A{D}_F\right)$. That is,
If $ADE<ADF$ (situation of Deficit Demand)
In the figure, $A{D}_1$ and $AS$ represents the aggregate demand curve and aggregate supply curve. The economy is at full employment equilibrium at point '$E$', where $A{D}_1$ intersects $AS$ curve. At this equilibrium point, $OY$ represents the full employment level of output and $EY$ is the aggregate demand at the full employment level of output.
Let us suppose that the actual aggregate demand for output is only $CY$, which is lower than $EY$. This implies that actual aggregate output demanded by the economy $CY$ falls short of the potential (full employment) aggregate output $EY$. Thus, the economy is facing a deficiency in demand.
This situation is termed as deficit demand. Margin requirements refer to the difference between the amount of loan granted and the market value of the mortgaged assets. In case of deficit demand, the central bank reduces the margin requirements for loans. This makes the loans easily assessable and cheaper. This encourages the people to demand greater volume of loans, hence, greater is flow of money supply in the economy. This finally raises the aggregate demand in the economy.