Financial Bubble Assignment

Answer each question within around 100 words paragraph so make total 400 words

SUMMARY: Federal Reserve Chairwoman Janet Yellen weighed in on a growing debate among investors and market economists, suggesting the years long stock rally may have driven prices too high and raising concerns that debt-market investors are taking excessive risks. Ms. Yellen's remarks came during a conversation with International Monetary Fund Managing Director Christine Lagarde before an audience at the IMF's headquarters in Washington. Ms. Lagarde asked the central-bank chief about the possibility that the Fed's rock-bottom interest-rate policy is leading to bubbles in financial markets. Other areas of possible concern are low differentials between the yields of riskier corporate bonds and safe-haven Treasury debt, and high levels of debt in the leveraged-loan market, she said.

CLASSROOM APPLICATION: The article can be used to introduce a discussion of bubbles, why the Fed's current interest-rate policies might be contributing to a bubble, how a bubble can be identified, and what can be done to prevent bubbles from forming.

QUESTIONS:

1. International Monetary Fund Managing Director Christine Lagarde asked Federal Reserve Chairwoman Janet Yellen whether the Fed's interest-rate policy might be leading to bubbles in financial markets. What is a bubble?

2. Why might the Fed's interest-rate policies be contributing to bubbles in financial markets?

3. How can a bubble be identified?

4. How can a bubble be prevented? 

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