Explain how a bubble can develop in the market for an asset
What will be an ideal response?
Investors imitating each other can help to fuel a speculative bubble. In a bubble, the price of an asset rises above its fundamental value. Once a bubble begins, investors may buy assets not to hold them but to resell them quickly at a profit, even if the investors know that the prices are greater than the assets' fundamental values. This increased demand for the asset causes its price to further exceed the fundamental value.
You might also like to view...
Argentina in 2001 faced a debt problem more serious than the U.S. debt problem because Argentina was obligated to repay its debt in
a. U.S. dollars. b. their own currencies. c. a relatively short period of time. d. large installments.
The behavior of the perfectly competitive firm
A. theoretically leads to an inefficient allocation of resources. B. maximizes the benefits to consumers, given the resources available to the economy. C. reduces output in order to raise prices in the short term. D. results in excess capacity and inefficiency.