What is meant by Margin Requirement? How does the Central Bank use this measure to control deflationary conditions in an economy?
Business and traders get credit from commercial bank against the security of their goods. Bank never gives credit equal to the full value of the security. It always pays less value than the security.
So, the difference between the value of security and value of loan is called marginal requirement.
In a situation of deficient demand leading to deflation, central bank decreases marginal requirements. This encourages borrowing because it makes people get more credit against their securities.
