After the instruction at 0x00400008 has executed, what happens?
The processor fetches the 32-bit pattern (whatever it is) at address 0x0040000C and tries to execute it as an instruction.
(Actually, the SPIM simulator stops at this point. This is a convenience for student programmers, but not what actual hardware would do.)
Any bit pattern that is fetched as an instruction by the machine cycle is interpreted as an instruction. The bit patterns in the fields tell the electronics what operation to perform and what data to use. If the bit pattern makes no sense as an instruction then the machine cycle is interrupted. This causes the program to "crash" (or to "bomb".) However, if the pattern can be interpreted as an instruction then it will be executed, whatever it does.
The control point of an executing program is the address in memory of the instruction being executed. When an instruction is being executed (in the third step of the machine cycle) the program counter holds the address of the instruction after the control point.
Normally the control point moves sequentially through the machine instructions. On the MIPS this means it normally moves through memory in steps of four bytes (32 bits) at a time. Usually "control point" is shortened to "control" and the phrase flow of control means how the control point moves through memory.
If control flow leads to an address in memory, then the four bytes starting at that address are fetched as a machine instruction. The processor has no other way to tell instructions from data. Whatever bit pattern gets pulled in from memory as an instruction will be executed as an instruction. It is common for the control point of a buggy program to enter a section of data. Now, bit patterns that were intended as data get executed as instructions. This sometimes leads to mystifying results.
By software convention, data and instructions are placed in different sections of memory. (This helps prevent mystifying results). But this is not a requirement of the architecture.
Some processors have bounds registers that the operating system sets to the first and last address of a user program. Only instructions within bounds may be fetched as instructions. This also helps prevent mystification.
Most computer systems start running an operating systems when power is applied. When an application program runs, the operating system passes control to the application.
What must the application do when it is finished running?