Self-study
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.
Mackay ·
17th century Dutch tulip market is example of speculative bubble
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).
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
Garber ·
Explanation of price rise
A new and prized variety naturally commands higher prices. This accounts for the initial rise in prices.
Garber ·
Explanation of price fall
Over time, there is more supply of the prized bulbs leading to a fall in prices.
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)
22.
Which one of the following ████ ██████████ █████████ ███ ████ █████ ██ ███ ████████
a
The seventeenth-century Dutch █████ ██████ ██ ██████ ███ ██████████ ████████ ██ ██████████ ██ ███████ ██ ███████ ██ █ ███████████ ███████
We don’t know that the author agrees with Garber. So we can’t say the author believes the Dutch tulip market is “mistakenly” believed to be an example of a speculative bubble. It’s also not clear that the belief the market is a speculative bubble is “widely” held.
b
Mackay did not ██████████ ██████ ███ ████████ ████ █████ ██ ███████ ████ ████ ███ █████████ ███████████████████ █████ █████ ██████
There’s no support for this. The passage doesn’t suggest that Mackay had any thoughts or assessments of the potential earnings from Dutch tulip bulbs. Although Garber describes potential earnings, this doesn’t imply anything about Mackay’s views about those earnings. Also, the author doesn’t necessarily agree with Garber. She merely reports Garber’s views. So we have no reason to think the author would call Mackay wrong or inaccurate about something.
c
A speculative bubble ██████ ████████ ███ █████ ██ ██ █████ █████████ █████████████ ████████ ██ █ █████ ███ ████████ ████████
This isn’t supported, because if a decline is driven by the “asset’s fundamentals,” then it’s not necessarily a speculative bubble. Also, Garber argued that the tulip market was not necessarily a speculative bubble; (C) doesn’t capture this view.
d
Garber argues that ████████ ███████ ███████ ██ ███ ███████████████████ █████ █████ ██████ ██ █ ███████████ ██████ ██ ███ █████████ ██ ███ █████████
This best captures the main point. Garber criticizes Mackay’s view that the Dutch tulip market was a speculative bubble. In P3, the author explains Garber’s reasoning.
e
A tulip bulb ███ ████████ █ ██████████ ██████ ██ ██████████ ████ ██ ███ █████ ██████ ████ ████ ███ █████████ █████████████
(E) is supported by the passage at the end, but it’s not the main point. It’s part of the reasoning supporting Garber’s criticism of Mackay’s view. The main point is Garber’s criticism.