At the Peak of Tulip Mania in Holland, in March 1637 GMAT Reading Comprehension

Reading Passage Question

At the peak of tulip mania in Holland, in March 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble. The term "tulip mania" is now often used metaphorically to refer to any large economic bubble (when asset prices deviate from intrinsic values).

The event was popularized in 1841 by British journalist Charles Mackay. According to Mackay, at one point 12 acres of land were offered for a Semper Augustus bulb. Mackay claims that many such investors were ruined by the fall in prices, and Dutch commerce suffered a severe shock. Some modern scholars, however, feel that the mania was not quite as extraordinary as Mackay described. Some even argue that not enough price data remain, historically, to represent an all-out tulip bulb bubble.

In her 2007 scholarly analysis of Tulipmania, Anne Goldgar states that the phenomenon was limited to "a fairly small group", and that most accounts from the period are based on a few contemporary pieces of propaganda. While Mackay's account held that a wide array of society was involved in the tulip trade, Goldgar's study of archived contracts found that even at its peak the trade in tulips was conducted almost exclusively by merchants and skilled craftsmen who were wealthy, but not members of the nobility. Thus, any economic fallout from the bubble was very limited. Goldgar, who identified many prominent buyers and sellers in the market, found fewer than half a dozen who experienced financial troubles in the time period, and even of these cases it is not clear that tulips were to blame. This is not altogether surprising. Although prices had risen, money had not exchanged hands between buyers and sellers. Thus profits were never realized for sellers; unless sellers had made other purchases on credit in expectation of the profits, the collapse in prices did not cause anyone to lose money.

There is no dispute that prices for tulip bulb contracts rose and then fell in 1636–37, but even a dramatic rise and fall in prices does not necessarily mean that an economic or speculative bubble developed and then burst. For tulip mania to have qualified as an economic bubble, the price of tulip bulbs would need to have become unhinged from the intrinsic value of the bulbs. Modern economists have advanced several possible reasons for why the rise and fall in prices may not have constituted a bubble. For one, the increases of the 1630s corresponded with a lull in the Thirty Years' War, which occurred between 1618 and 1648. Hence market prices were responding rationally to a rise in demand. However, the fall in prices was faster and more dramatic than the rise, and did not result from a sudden resurgence in the war.

‘At the peak of tulip mania in Holland, in March 1637’ is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 7 comprehension questions.

The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Questions and Solutions

1. The author of the passage implies that had the lull in the Thirty Years' War ceased more abruptly then

1. the tulip mania would have likely spread throughout other parts of Europe
2. the price of tulips would not have become separated from the intrinsic worth of the flower
3. the price of the tulips would have fallen at a similar rate, if not even more steeply
4. the drop in the number of tulips traded would not have been as significant
5. the aristocracy would have likely suffered significant losses as a result of the tulip trade

2. Based on the passage, all of the following are mentioned as casting doubt on Mackay’s thesis EXCEPT

1. Accounts of tulip mania came from limited and not totally credible sources
2. Trade of tulips was limited to a certain group of people
3. There was a dearth of information relating to the price of tulips throughout the mania
4. The nobility ceased to trade in tulips once prices began to increase sharply
5. The rise in the price of tulips corresponded with the changes in the Thirty Years War

3. It can be inferred from the passage that which of the following applies to the merchant and skilled craftsmen in 17th century Holland who traded in tulips?

1. They made up a smaller total percentage of the economy than did the nobility.
2. They were likely to experience financial difficulties during the tulip mania.
3. They used the term “tulip mania” to refer to the high prices of tulips in the 17th century.
4. They caused an economic crisis through their speculative trading of tulips.
5. They commonly sold highly priced tulips to members of the nobility.

4. The author of the passage believes that an economic bubble occurs when

1. the demand for a luxury good becomes far greater than the supply of that good
2. the price of a good far exceeds the inherent worth of that good
3. too many buyers pay a price that the sellers know is inflated
4. there is a sudden absence of any buyers for a product
5. there a dramatic rise in prices followed by a sudden drop

5. According to the passage, Charles Mackay believed which of the following about the “tulip mania” that engulfed Holland in the 17th century?

1. The phenomenon was actually limited to a small number of investors.
2. All those who had invested money in the tulip trade were unable to realize any profit.
3. There is not enough data to support the claim that other sectors of the Dutch economy were adversely affected.
4. Speculation on tulips could negatively affect other parts of the economy.
5. The price of the tulip dropped so precipitously that all of Europe was affected.

6. The function of the last paragraph is to

1. discount another possible explanation for the tulip mania
2. provide a more valid explanation than the one offered in Goldgar’s study
3. account for an observed trend in the Dutch economy in 1636-37
4. discuss a new theory and then illustrate the shortcomings in that theory
5. illustrate the connection between economic and political events

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