1. How can the bursting of an asset-price bubble in the stock market help trigger a financial...

Question

1. How can the bursting of an asset-price bubble in the stock market help trigger a financial crisis?
2. How does an unanticipated decline in the price level cause a drop in lending?
3. When can a decline in the value of a country s currency exacerbate adverse selection and moral hazard problems? Why?
4. How can a decline in real estate prices cause deleveraging and a decline in lending?
5. How does deterioration in balance sheets of financial institutions and simultaneous failures of these institutions cause a decline in economic activity?

Robert · Accepted Answer

1). Asset- Price bubble is the rise of prices in the stock market .Therefore,at the bursting point, it causes all the stocks prices to realign to regular value.When this happens,It Decreases  Net Worth ,which then increases Asymmetric Information or Lead to a Deterioration  in Financial Institutions' Balance Sheets,causing them to Delevearge.This bubble is driven by : Investor Psychology raising prices,and credit Booms.
2).     This is in stage 3 of 3 in U.S.Financial Crisis.Thus drop in price level creates the Asymmetric Information to be at its highest .Also,can push the I/R even higher.

1. How can the bursting of an asset-price bubble in the stock market help trigger a financial crisis? 2. How does an unanticipated decline in the price level cause a drop in lending? 3. When can a...

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