Money and Banking — Economics STD 12 Humanities & Commerce — Question

Margin requirements refer to the excess of security amount over loan amount. In other words, margin requirements refer to the difference between the value of the security offered for loan and the value of loan granted. Suppose a person mortgages goods worth ₹ 10,000 with a bank and the bank gives him loan worth ₹ 38,000, the margin requirement in this case would be 20%. To curb excess demand, the Central bank raises the margin requirement. The borrowers are now given less money in the form of loans against the mortgaged goods. Thus, credit contracts and aggregate demand gets reduced. To correct the situation of deficient demand, margin is reduced to encourage borrowing. Commercial banks can now give more advances against the mortgaged goods. Thus, credit expands and aggregate demand increases.