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

Margin requirement refers to the difference between the amount of the loan and the value of the security offered by the borrower against the loan. To correct the situation of the deflationary gap, the Central Bank may reduce the margin requirement. It may lead to an increase in the amount of loan available on the security offered. This will increase the availability of credit and consequently, the Aggregate Demand in the economy will increase. Thus, by altering the margin requirements, the Central Bank can alter the amount of loans made against securities by the banks.