Based on what we know about asset price formation, what steps can a government use to restrict the formation of an asset price bubble?
A) Lower interest rates in order to discourage savings and investment
B) Loosen lending requirements for banks, which encourages investors to buy bank stock rather than the "bubbling" asset
C) Increase the money supply
D) Raise interest rates in order to increase the costs of financing asset purchases

Question

Quizplus · Accepted Answer

Raising interest rates is the most effective way for the government to restrict the formation of an asset price bubble because it increases the cost of financing asset purchases, which decreases demand for the asset and can ultimately deflate the bubble. Lowering interest rates, loosening lending requirements, and increasing the money supply can all have the opposite effect and contribute to the formation of a bubble.

Based on What We Know About Asset Price Formation, What