1. Which of the following statements is correct?

a. Arranging an acquisition of a failing financial institution is the least favoured policy choice of the Fed.

b. The Fed expanded its Lender of Last Resort authority to investment banks to address the solvency problem of these institutions.

c. The policies of the Fed and the US government during the 2008 Crisis would encourage financial institutions to grow bigger.

d. A governments bailout can save an economic sector and will unlikely change the moral hazard and adverse selection problems.

2. Which of the following statements is correct?

A. When the Fed increases money supply, the reserves balance that the banking system has with the Fed will likely increase.

B. When the Fed reduces money supply, the asset side of the Feds balance sheet will likely increase.

C. When the Fed purchases treasury securities from the banking system, fed fund rates will likely increase if the initial equilibrium fed fund rates are lower than the discount rate.

D. When the Fed lowers the discount rates, fed fund rates will likely remain the same if the initial equilibrium fed fund rates are the same as the discount rates.

3. Which of the following statements is correct?

a. CDS contracts reduce the default risk of the underlying assets.

b. CDS contracts transfer the interest rate risk between the two parties.

c. OTC derivative arrangements lower counterparty risk using collaterals.

d. An investor can buy a CDS contract only when he/she does not hold the reference bond.

e. CDS contracts provide CDS sellers with insurance against default events.

4. Which of the following statements is correct?

A. When banks have less capital than required by regulations, they must liquidate their assets.

B. When banks have less reserves than required by regulations, they must borrow reserves from the market for fed funds.

C. Reinvestment risk is present in all bond investments.

D. Higher interest rate expectations will likely encourage households to borrow more and corporations to invest more in the current market.

5. The financial markets face adverse selection problems when

A. high-risk borrowers are subject to higher interest rates, and low-risk borrowers are subject to lower interest rates.

B. non-bank financial institutions are more competitive than traditional banking institutions in providing short-term loans.

C. deposit insurance causes depositors to prioritize the deposit rates that banks offer and overlook the banks financial condition.

D. banks have a better understanding of mortgages' default risk and prioritize the securitization of high-risk mortgages.