What is an economic bubble?

An economic bubble is characterized by a condition of rapid price increase followed by a decline. This phenomenon typically occurs when the prices of assets, such as real estate or stocks, are driven up based on excessive demand, speculation, or irrational exuberance, rather than underlying fundamentals. Investors may become overly optimistic, leading to unsustainable price levels that eventually burst, resulting in a sharp decline in prices. This cycle illustrates the volatility and unpredictability of markets influenced by psychological factors.

The other options do not accurately describe an economic bubble. A stable increase in asset prices suggests a healthy market driven by fundamental growth rather than speculation. An analysis of market fundamentals refers to evaluating the intrinsic value of assets based on economic indicators, which does not capture the essence of a bubble's price dynamics. Lastly, a gradual market correction implies a slow adjustment back to equilibrium, rather than the explosive rise and fall inherent in the bubble phenomenon.