In what ways do alterations in margin requirements impact the ease with which households and firms can obtain credit ? Assuming for a hypothetical economy, government induces an additional investment of Rs. 1,000 crore and 80 percent of additional income is spent on consumption. Estimate the values of the following : (i) Investment multiplier (K) (ii) Change in income (DY)

Question

Accepted Answer

Alterations in margin requirements impact credit accessibility:

Impact:
1. Decrease in margin requirements:
- Easier to get loans
- More credit available
- Stimulates borrowing
- Increases economic activity

2. Increase in margin requirements:
- Difficult to get loans
- Less credit available
- Discourages borrowing
- Reduces economic activity

Numerical Example:
Additional investment = Rs. 500 crore
MPC = 0.8
Multiplier = 1/(1-0.8) = 5

Change in income = 5 × 500 = Rs. 2,500 crore

If margin requirement is reduced:
- More credit available
- Investment increases
- Income increases by Rs. 2,500 crore
- Employment increases
- Economic activity improves