Question

How would the Central Bank Digital Currency improve the financial stability?

Answer 1

Ans.

Central bank digital currency which is also known as digital fiat money . An increase in the overall quantity of Central bank digital currency can boost financial stability because it is not required to have any additional reserve holding which enable them to enhance financial stability ,in two ways -

1. By public credit supply to increase
2. and this increase in supply which enables the bank to lower the nominal interest rate.

By this financial stability is achieved.

Note - when this type of account is introduced , it lowers the private credit supply of banks (commercial ) , which makes the nominal interest rate to rise and by this the bank deposit ratio also decreases. So to fight this , Central bank digital currency uses the above two steps to increase the stability .

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