Question

In the early 2000s, easy credit made real estate the investment of choice in the United States. By the end of the decade, however, a recession had set in, impacting almost all businesses in the country. This example shows that _____.

Answer 1

This example shows that economic boom periods can overheat and lead to speculative bubbles.

A Speculative Bubble: What Is It?

A speculative bubble is characterized by a rapid, dramatic price increase that is driven more by market momentum and mood than by underlying fundamentals.

Fundamentals like significant profit growth or hopes of future market dominance at first fuel the speculation, but these fundamentals are eventually overtaken by other factors that don't reflect the real value of the company or industry.

Prices rise when investors rush to buy, thinking that prices will rise further and that if they don't buy, an opportunity will pass them by.

Fundamentals eventually overtake momentum, the bubble bursts, the stock tanks, and prices fall back to their pre-bubble levels.

Learn more about speculative bubble with the help of the given link:

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