Question

when the flow of new money stops, or even slows substantially,this can cause the asset bubble to sends prices falling precipitously and wreaks havoc for latecomers to the game, most of whom lose a large. What causes an asset-price bubble?

Answer 1

An asset-price bubble is caused by factors such as excessive optimism, leverage, and an abundance of credit, which can inflate asset prices beyond their real value.

Step-by-step explanation:

An asset-price bubble occurs when the prices of assets such as housing or stocks increase rapidly over a short period, reaching levels that are not supported by their underlying value. This can be the result of various factors, including excessive optimism, leverage cycles, and an abundant supply of credit. During periods of economic expansion, there is often a surge in lending and borrowing, which can inflate asset prices to unsustainable levels. The subsequent popping of these bubbles can lead to a sharp decline in asset values, resulting in significant financial distress, as assets held by banks and individuals lose value rapidly.

Central banks like the Federal Reserve, wary of the impact of rapidly rising asset prices, may struggle with the decision of whether to intervene in order to moderate these effects. The bursting of asset bubbles can cause widespread economic damage, as seen in the Financial Crisis of 2007, which was precipitated by the collapse of the housing bubble. Asset-price bubbles and their bursts can severely impact financial institutions and drag the broader economy into recession due to the associated credit freeze and decreased spending.