In Fall 1999, people in the financial community were making their final plans for the beginning of the year 2000. Everyone was concerned about the Y2K problem. The primary concern was that public would panic and remove significant amount of cash from banks. a. What would the effect of removing cash from banks be on the following: the monetary base, the money multiplier and the money supply? Explain b. Explain the banking system response to the expected event? c. Explain the Fed response to the expected event Solution a. when majority of the money is drawn from banks, banks need huge physical money which is not possible to supply. because in every economy banks holds physical cash very limit and they hold assets interms of cheqes and other forms. money supply falls, and the demand is high for physical money b. banks are reacted in planned way, and they provided maximum amount of money to the depostiers. c. Fed feared to supply physical money to meat the market demand. .

1. In Fall 1999, people in the financial community were making their final plans for the beginning
of the year 2000. Everyone was concerned about the Y2K problem. The primary concern was
that public would panic and remove significant amount of cash from banks.
a. What would the effect of removing cash from banks be on the following: the monetary base,
the money multiplier and the money supply? Explain
b. Explain the banking system response to the expected event?
c. Explain the Fed response to the expected event
Solution
a. when majority of the money is drawn from banks, banks need huge physical money which is
not possible to supply. because in every economy banks holds physical cash very limit and they
hold assets interms of cheqes and other forms.
money supply falls, and the demand is high for physical money
b. banks are reacted in planned way, and they provided maximum amount of money to the
depostiers.
c. Fed feared to supply physical money to meat the market demand.