PT126.S2.P4.Q24

PrepTest 126 - Section 2 - Passage 4 - Question 24

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P1

In economics, the term "speculative bubble" refers to a large upward move in an asset's price driven not by the asset's fundamentals—that is, by the earnings derivable from the asset—but rather by mere speculation that someone else will be willing to pay a higher price for it. ███ █████ ████████ ██ ████ ████████ ██ █ ████████ ███████ ██ ██████ ███ ██ █ ████ ██ ██████████ ████ ███ █████ ████ ████████ ██ █████ ███ ███ ████████ ██ ████ ██ ████ ██████ ███

Intro to Topic · Speculative bubble
Speculation is when I buy a machine merely because I speculate that someone else is willing to pay more for the machine. If everyone thought like that, it would drive up the price of the machine. Contrast with buying a machine because I expect that the machine can produce goods that will earn a return on my investment.
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Mackay · 17th century Dutch tulip market is example of speculative bubble
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Garber · Disagrees; it's not
P2

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Background Facts · Netherlands was center of tulip cultivation
One Semper Augustus bulb, a prized variety, sold for $11k (in today's money).
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Mackay · Rapid price increase attracted speculators which further fueled price increases leading to sudden price collapse
P3

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Garber · Price rise and fall can be explained by economic fundamentals
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Garber · Explanation of price rise
A new and prized variety naturally commands higher prices. This accounts for the initial rise in prices.
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Garber · Explanation of price fall
Over time, there is more supply of the prized bulbs leading to a fall in prices.
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Garber · But that's not a speculative bubble
Original high price of the bulb was rationale. The bulbs produced future generations of bulbs and hence produced a return on investment. It was not just speculation that someone else will be willing to pay even more for the bulb.
Passage Style
Critique or debate
Phenomenon-hypothesis (RC)
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24.

The passage most strongly supports ███ █████████ ████ ██████ █████ █████ ████ █████ ███ ██ ███ █████████ ███████████

a

If speculative bubbles █████ ██ ████ ████ █████ ████ ███████

Not supported. We don’t know Garber’s opinion about the frequency of speculative bubbles. We only know what he thinks about whether the Dutch tulip market was a speculative bubble.

2%
b

Many of the ██████ ██ ███████████ ████████ █████ █████ █████ ████ ████████ ██ ██ █████ ██████ █████ ████████ ███████████ ████ █████ ██ ███ ████ █████ ██████████ ████ ███ ████████ ██████

Supported. Garber offers the potential for earnings from selling copies of the original bulb as a reason that the initial purchase at a high price does not have to be irrational. This suggests he thinks people who bought the original bulb could have rationally expected not to lose money as long as they sold copies made from their original bulb.

58%
c

If there is ███ █ ███████████ ██████ ██ █ ███████ ████ ███ █████ ██ ██████ ██ ████ ██████ ██ ███ ███████████

Not supported as something Garber would agree with. Garber thinks that if the prices are not irrational, then there’s no speculative bubble. But (C) reverses this relationship. Garber doesn’t have to think that if there’s no speculative bubble, the prices are not irrational. Maybe he could think prices can be irrational for other reasons unrelated to the presence or absence of a speculative bubble.

10%
d

Most people who ████████ ██ █████ █████ █████ ██ ███ ███████████ ███████ ████ █████████ ████████ ██ ███ █████ ████████████

Not supported as something Garber would agree with. We don’t get any evidence of Garber’s thoughts concerning “all” the investments of those who invested in Dutch tulip bulbs. Although we know what he thinks about their investment in Dutch tulip bulbs, this doesn’t constitute evidence of what he thinks about other kinds of investments.

11%
e

Mackay mistakenly infers ████ ███ ████ ████ █████ ██████ ███████ ███████ ████ ███ ████ ███ ██████ ████ ███ █████ ██████████ ████ ███ ████ ███████████

Not supported. Garber thinks Mackay is wrong to believe that the original high prices were irrational. But there’s no evidence Garber thinks Mackay believed the later, low prices were irrational.

20%

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