Asset bubbles

Question 1

What are the three types of assets people can own as a form of wealth?

Answer 1

Real assets: Physical, e.g- Property, gold, commodities, jewellery Financial assets: Stocks and shares, government bonds Virtual Assets: Only exist on the Internet, E.g Bitcoin

Question 2

Explain what an asset bubble is

Answer 2

People’s expectations affect the value of assets A bubble is where prices are influenced by speculative factors. If people expect an items price to keep increasing they will buy, increasing demand and the price will keep going up. If they think prices will decrease they sell and prices keep falling due to increased supply

Question 3

Explain how the housing market is an asset bubble

Answer 3

From 2002 to 2008:

The economy was growing very fast –> peoples incomes were going up –> quite hard to build new houses in the UK –> people were expecint house prices to keep increasing so demand for houses went up and therefore house prices kept increasing.

The reccession made it very hard to get a mortgage as the banks were in major trouble, this made people think that house prices were going to fall which lead to a very rapid decline in houise prices.

Question 4

What are the negative affects on the economy of a sharp decline in prices in an asset bubble? (use housing market as example)

Answer 4

1. Consumers become more pessismistic, this is called a negative wealth affect
2. There may be a lot of businesses that depend on the asset bubble (housing market), a decrease in demand for houses is a decrease in demand for them too. E.g- House builders, estate agents, solicitors, insurance companies, removal firms.