Explain the difference between adaptive expectations and rational expectations. Provide at

least three important implications for the financial markets of markets where parties tend to

behave as if they possessed rational expectations.

Describe the elements of bank assets and liabilities that differ from that of a typical non$-$

financial$($Industrial$)$ corporations.

Explain how the banking system might create money when there is a $$1$ million injection by

the Federal Reserve. Provide a numeric example, and assume banks lend out $80\%$ of a deposit

and those who take loans deposit $80\%$ of the loan amount.

Explain why a financial institution is more likely to take higher risk if it has lower capital.

How is that issue compounded by the low level of common equity in a typical bank? Explain.