Th4.4: ^^ Speculation and Market Bubbles

Question 1

Almost all trading in financial markets is speculative and this lead to…

Answer 1

the creation of market bubbles - where the price of a particular asset rises massively then falls

Question 2

Why do market bubbles tend to occur?

Answer 2

because investors see the price of an asset is rising and so decide to purchase this asset as they believe the price will continue to rise and will profit them in the future - leads to prices excessively high and then investors decide it will fall, resulting in mass selling

Question 3

How has the financial market caused market bubbles in the housing market?

Answer 3

by lending too much in mortgages and increasing demand for houses

Question 4

What happens when this bubble bursts in the housing market?

Answer 4

there is a fall in demand for houses and a negative wealth effect, reducing AD and banks are left with loans that will not be repaid in full

Question 5

What is another example of a bubble?

Answer 5

Wall street crash 1929

Question 6

What kind of irrational behaviour can be seen in market bubbles?

Answer 6

herding behaviour