Explain the concept of 'deflationary gap'. Also, explain the role of 'margin requirements' in reducing it.
CBSE OUTSIDE DELHI - SET 1 2012
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Deflationary gap refers to Aggregate Demand falling short of Aggregate Supply at the full employment level of income. It is called deflationary because it brings in deflationary tendencies.
Margin requirements refer to the discount on the security mortgaged by the borrowers. It is determined by the central bank. In case of deflationary gap the central bank reduces the discount so that the capacity to borrow is increased. This raises AD.
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