Question

In what ways do alterations in margin requirements impact the ease with which households and firms can obtain credit ?

Hint:

Margin requirement is the gap between the loan and the value of the security. A higher margin cuts the loan available on a security, and a lower margin raises it.

Answer 1

Step 1: Meaning of Margin Requirement:
Margin requirement is the difference between the amount of the loan and the value of the security offered by the borrower against the loan.
For example, if a borrower offers a security worth Rs. 1,00,000 and the margin is 40%, the bank lends only Rs. 60,000.

Step 2: Effect of an Increase in Margin Requirement:
When the central bank raises the margin requirement, banks lend a smaller part of the security value.
The amount of loan available to households and firms on the same security falls. Credit becomes harder to get.

Step 3: Effect of a Decrease in Margin Requirement:
When the margin requirement is lowered, banks can lend a larger part of the security value.
With the same security, the loan is larger. Credit becomes easier to get.

Final Answer:
A change in the margin requirement changes the amount of credit that households and firms can get against their security. A higher margin reduces credit and a lower margin increases it.