"Margin requirements are extremely helpful in correcting the situation of deflationary gap in an economy". Justify the given statement with valid arguments.

Question

Accepted Answer

Margin requirements help in correcting deflationary gap:

Justification:
1. Margin requirements are the difference between loan amount and collateral value
2. When margin requirements are decreased:
- Borrowers can get more loans against same collateral
- Credit availability increases
- Borrowing becomes easier
- Consumption and investment increase
- Aggregate demand increases
- Deflationary gap is corrected

Example:
If margin requirement is reduced from 25% to 20%:
- Borrower with Rs. 100 collateral can get Rs. 80 loan (instead of Rs. 75)
- Credit availability increases by Rs. 5
- This stimulates economic activity

Margin requirements are a qualitative tool of monetary policy that helps in directing credit to specific sectors.