The financial sector and crises - Basic mechanisms - Asset price bubbles
6 important questions on The financial sector and crises - Basic mechanisms - Asset price bubbles
What does the price dynamic equation show?
Describe the price dynamic processes in different kinds of markets
The normal response to a price increase in a situation of excess supply is a fall in the price. In the tulip bulb case, the initial price rise leads the demand curve to shift upwards.
Describe the impact of changes in price expectations in a market with an S-shaped PDE curve
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Describe the mechanics of the financial accelerator
2. A positive shock to house prices relaxes credit constraints.
3. Households borrow more.
4. Some of this borrowing is used for consumption and some is used to buy more housing. This shifts the IS curve.
5. The increased demand for housing, pushes the price up further and the financial accelerator process begins at step 1.
Why is the financial accelerator a positive feedback process?
What are the effects of relaxation of credit constraints?
2. It feeds back to push house prices up further.
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