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					ECONOMICS – SOTNICK + BRADY
“STRIKING IT RICH” (network,bubble)

Please read the attached article “Striking it Rich” by John Cassidy and answer the following
questions. Please note that this article is long and deep – find a quiet place for an hour to read it.
Stick with it…there’s a lot here! Please answer on a separate sheet of paper in complete
sentences.

Vocabulary or concepts you might come across:
The connection between lower interest rates and higher stock prices – if interest rates are
low, then it is cheaper for corporations to borrow money to expand. Therefore, they borrow more
money, expand, and become more attractive investments. In addition, if interest rates are low,
then consumers borrow more money and buy more stuff. They buy stuff that is made by
corporations, so those corporations make more money and become more attractive investments.
IPO – initial public offering – the first time that a stock is sold to investors. The money that is
raised in an IPO goes to the business so that they can operate. After it’s IPO, a stock is traded
between investors without the corporation earning money on these transactions.
Bulls/Bears – people are considered bulls or bullish if they expect the stock market to rise (they
are buyers). People are considered bears if they expect the stock market to decline (they are
sellers).
Speculation – it’s just a fancy word for gambling (not investing).

1. In a few sentences each, explain how each of these factors contributed to “irrational
exuberance” – or the massive increase in the stock market. Mostly, this list goes in order.

    a.   401k plans
    b.   Books written on how to invest
    c.   Mutual funds
    d.   The event that occurred on August 9, 1995
    e.   Ameritrade and other online trading accounts
    f.   Greenspan’s reluctance to increase interest rates
    g.   CNBC
    h.   Day trading
    i.   The intertwining of the real economy and the financial economy

2. Which of the factors that you wrote about above contributed the most to the “irrational
exuberance”? Explain your choice.
3. How and why did the bubble burst – what sent the stock market down and why did it keep
going down?
4. What lessons have we learned from this? List at least three.
5. Are we destined to repeat this cycle or have we learned? Support your answer with intelligent-
sounding reasoning.

				
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posted:4/13/2012
language:English
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