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1. Explain how a bubble can develop in the market for an asset.

1. Explain how a bubble can develop in the market for an asset.

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Answer #1

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A bubble is created in the asset market when there are highly inflated price of the asset in the market and people still demand for it. It leads to creation of bubble in the market. It starts with the quick buy and sale of assets in the market. With trading of assets at faster pace, price increases. Besides, there will be a creation of artificial demand of the assets that will be more than the supply. Due to excess demand, shortage in the market is created. Due to this shortage of the asset, the price of the asset increases and bubble is created.
The excess demand sustains even if, the bubble is in place, because of the banks and other financial institutions adopt aggressive policy of lending to people and institutions.

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