Margin requirements are the minimum amount of money that a borrower must put down as collateral for a loan. They are used by the central bank to control the amount of credit that is available in the economy.
Types of margin requirements
There are two main types of margin requirements:
- Initial margin requirement: This is the amount of money that the borrower must put down when they first take out the loan.
- Maintenance margin requirement: This is the minimum amount of money that the borrower must keep in as collateral at all times.
How margin requirements work
When the central bank increases the margin requirement, it makes it more expensive for borrowers to take out loans. This is because they need to put down more money as collateral. This can help to slow down the growth of the economy and reduce inflation.
On the other hand, when the central bank decreases the margin requirement, it makes it cheaper for borrowers to take out loans. This can help to stimulate the economy and promote growth.
Advantages of margin requirements
Margin requirements are a relatively effective way to control the amount of credit in the economy. They are also relatively easy to implement and administer.
Disadvantages of margin requirements
Margin requirements can have a negative impact on economic growth. They can also make it more difficult for businesses to get the financing they need to operate.
MCQs on Margin Requirements
- What are margin requirements?
- They are the minimum amount of money that a borrower must put down as collateral for a loan.
- They are the maximum amount of money that a borrower can borrow.
- They are the interest rate that a borrower must pay on a loan.
- They are the amount of money that a borrower must repay on a loan.
- The answer is They are the minimum amount of money that a borrower must put down as collateral for a loan.
- What are the two main types of margin requirements?
- Initial margin requirement and maintenance margin requirement.
- Repo rate and reverse repo rate.
- Bank rate and CRR.
- SLR and OMO.
- The answer is Initial margin requirement and maintenance margin requirement.
- What happens when the central bank increases the margin requirement?
- It makes it more expensive for borrowers to take out loans.
- It makes it cheaper for borrowers to take out loans.
- It has no effect on the cost of borrowing.
- It cannot be determined.
- The answer is It makes it more expensive for borrowers to take out loans.
- What are the advantages of margin requirements?
- They are relatively effective in controlling the amount of credit in the economy.
- They are relatively easy to implement and administer.
- They have no negative impact on economic growth.
- All of the above.
- The answer is All of the above.
- What are the disadvantages of margin requirements?
- They can have a negative impact on economic growth.
- They can make it more difficult for businesses to get the financing they need to operate.
- They are difficult to implement and administer.
- All of the above.
- The answer is All of the above.