Unit 1. 18- Moral Hazard, Speculation and Market Bubbles

What is speculation?

Buying or selling something in the hopes of a future price change and a chance for profit

What can cause a housing bubble?

Increase in demand Limited supply

What is the impact of market bubbles?

Market bubbles lead to overvaluation, irrational investor behavior, collapse risks, economic instability, and loss of confidence. Cause: causes of irrational behavior and risk

What is the impact of moral hazard on economic agents?

Moral hazards lead to risky behavior, distorted decision-making, higher costs, market inefficiency, and erosion of trust among economic agents. Cause: asymmetric information

Why does the government protect some banks?

Unemployment Lost savings(lack of trust) No loans Exponential government expenditure

What is a moral hazard?

When an economic agent makes a decision in their own best interest knowing that there are potential adverse risks, and that if problems result, the cost will be partly borne by other economic agents.

What are market bubbles?

When rising demand drives prices beyond an expected level

What does "too big to fail" mean?

When the cost to the economy of something failing is so great that the government cannot allow it to happen E.g banks