Questions: Which of the following is most likely to be asset price inflation? A rise in the current price of assets caused by expectation of higher asset prices in the future A rise in the price of assets caused by an increase in the underlying productivity of those assets A rise in the current price of assets caused by a shift in people's time preference A rise in the current price of assets caused by an increase in the riskiness of financial assets

The answer is the first one: A rise in the current price of assets caused by expectation of higher asset prices in the future.

Explanation for each option:

1. A rise in the current price of assets caused by expectation of higher asset prices in the future:

   • This is the most likely scenario for asset price inflation. When investors expect that asset prices will increase in the future, they are willing to pay more for those assets now, driving up current prices. This expectation-driven increase is a classic example of asset price inflation.

2. A rise in the price of assets caused by an increase in the underlying productivity of those assets:

   • This scenario describes a fundamental improvement in the value of the assets due to increased productivity. While this can lead to higher asset prices, it is not considered asset price inflation because the price increase is justified by the improved fundamentals.

3. A rise in the current price of assets caused by a shift in people's time preference:

   • A shift in time preference (e.g., people preferring current consumption over future consumption or vice versa) can affect asset prices, but this is more related to changes in interest rates or savings behavior rather than asset price inflation.

4. A rise in the current price of assets caused by an increase in the riskiness of financial assets:

   • An increase in the riskiness of financial assets would typically lead to a decrease in their prices, as investors would demand a higher risk premium. This scenario does not describe asset price inflation.

Summary: Asset price inflation is most likely to occur when there is a rise in the current price of assets driven by the expectation of higher asset prices in the future. This expectation can create a self-fulfilling cycle where prices continue to rise based on speculative behavior.