What characterizes a financial bubble?

A financial bubble is characterized by a rapid inflation of asset prices, which is often driven by speculation, market enthusiasm, and excess liquidity, leading to prices that significantly exceed their intrinsic value. This rapid ascent is typically unsustainable and eventually results in a sudden decline when reality sets in or when the market loses confidence, prompting a sharp drop in prices.

The scenario described captures the essence of a financial bubble, where the market can become overly optimistic, causing a disconnect between actual values and perceived values. Subsequently, this overvaluation culminates in a collapse as investors realize the true worth of the assets. Understanding this dynamic is crucial for investors to recognize the signs of a bubble and protect themselves from significant losses.

In contrast, the other options illustrate conditions that do not accurately reflect the nature of a financial bubble. Slow and steady growth suggests a stable market with sustainable increases in asset prices. Stable prices that reflect intrinsic value indicate a balanced and rational market without the wild fluctuations characteristic of bubbles. Likewise, consistent demand for luxury commodities does not pertain directly to the explosive nature of financial bubbles and may exist independently of bubble dynamics. Thus, option B effectively encapsulates the defining features of a financial bubble.