Discuss the inefficiencies that can be caused by stock market bubbles, especially focusing on firms and consumers.

What will be an ideal response?


Stock market bubbles can lead to the inefficient allocation of investment funds. Those companies that are positively affected by the bubble and see their stock prices increase will find it relatively less expensive to raise funds and consequently may over-invest. On the other hand, those firms who are not the object of stockholder euphoria will find it more expensive to attract funds and as a result may under-invest. For consumers, the bubbles can lead to increased wealth for some individuals who as a result may consume more, save less, buy expensive automobiles, homes, vacations etc. These individuals may even work less or retire early. When the bubble bursts these individuals are left trying to adjust, which can be not only inefficient but traumatic. Also, the companies that geared up to provide these luxury goods are left to adjust. So the result is the bubbles and their subsequent bursts result in real investment and spending that is inefficient.

Economics

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Which of the following statements is true?

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Economics

A good is classified as inferior if:

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Economics