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Explain How 'Margin Requirements' Are Helpful in Controlling Credit Creation? - Economics

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Explain how 'margin requirements' are helpful in controlling credit creation?

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Solution

Margin requirement is the difference between the current value of the security given for a loan and the value of loan granted. For example, mortgaging land for Rs 100 lakh with the bank for a loan of Rs 75 lakh. So, the margin requirement would be Rs 25 lakh. Therefore, to control deflation, the central bank reduces the margin money requirement which induces borrowers to avail more loans from commercial banks.

Concept: Central Bank Function - Controller of Credit
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