PT126.S2.P4.Q25 > Analytics

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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

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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

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.

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)

25.

The passage states that Mackay ███████ █████ ███ ██ ███ ██████████

The rapid rise ██ █████ ██ █████ █████ █████ ███ ███ ███ ██ ███ ██████████████ ██ ███ ███████ ████ █████████

Not stated. Although Garber claimed that the rapid rise in price could have resulted from the fashionability of tulips, we’re never told Makcay’s thoughts on the fashionability of flowers and their contribution to price.

The prices of ███████ █████████ ██ █████ █████ █████ ██████ ███ ███████████ ███████ █████ ██ █████ ███ █ █████ ██████████ ██ ████████████

Supported as something Mackay agrees with.

85%

The Netherlands was ███ ████ ██████ ██ ███████████ ███ ███████████ ██ ███ █████ █████████ ██ ███ ███████████ ████████

Not supported as Mackay’s belief. We have no evidence Netherlands was “the only” center of cultivation/development of new tulip varieties in the 17th century or that Mackay believes that it was.

The very high ██████ ██ █████ ██ ███ ███████████████████ █████ █████ ██████ ████ ███ ███████████

Anti-supported. Mackay believes the Dutch tulip market involved a speculative bubble, which means the prices are not driven by the earnings derivable from the asset. (D) is what Garber believes, but it’s not what Mackay thinks.

Buyers of rare ███ ████ █████████ █████ █████ █████ ████ ██████████ ████ ██ ██████ ████████ ████ █████ ██████████ ████ ███ ████████ ██████

Not supported as Mackay’s belief. Garber is the one who thinks people might have derived reasonable investment returns from the original tulip bulbs. But Mackay believes the tulip market involved a speculative bubble.

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PrepTest 126 - Section 2 - Passage 4 - Question 25

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