Question

Which of the following statements is true? A. Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity B. Bubbles driven solely by irrational exuberance lead to a failure of financial institutions C. Both A and B are correct D. Neither A nor B is correct

Answer 1

Answer: A. Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity.

Step-by-step explanation:

Asset bubbles are basically the when the prices of the assets rapidly rise in a short period of time. They are mostly backed or supported by increase in bid by investors.The problem arises when it is a credit driven asset. This leads to dangerous lending in return of profit or security. For example the financial crisis of 2008. This type of credit driven asset bubbles lead to debt inflation. Causing havoc and currency crisis.