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CHAPTER 9 | Unemployment and Inflation
Brief Chapter Summary and Learning Objectives

9.1 Measuring the Unemployment Rate, the Labor Force Participation Rate,
and the Employment-Population Ratio (pages 280–290)
Define the unemployment rate, the labor force participation rate, and the employment-population
ratio and understand how they are computed.
▪ The U.S. Bureau of Labor Statistics uses a monthly household survey to calculate the
unemployment rate, the labor force participation rate, and the employment-population
ratio.
9.2 Types of Unemployment (pages 290–293)

Identify the three types of unemployment.
▪ The three types of unemployment are as follows: frictional, structural, and cyclical.
9.3 Explaining Unemployment (pages 293–295)

Explain what factors determine the unemployment rate.
▪ Government policies can reduce the level of frictional and structural unemployment by
aiding job search and worker retraining.
▪ Government policies can add to the level of frictional and structural unemployment by
increasing the time workers devote to searching for jobs, providing disincentives for
firms to hire workers, or by keeping wages above their market level.
9.4 Measuring Inflation (pages 295–298)

Define the price level and the inflation rate and understand how they are computed.
▪ The price level measures the average prices of goods and services in the economy. The
inflation rate is the percentage increase in the price level from one year to the next.
9.5 Using Price Indexes to Adjust for the Effects of Inflation (pages 298–300)
Use price indexes to adjust for the effects of inflation.
▪ To correct for the effects of inflation, we divide a nominal variable by a price index and
multiply by 100 to obtain a real variable.
9.6 Nominal Interest Rates versus Real Interest Rates (pages 301–302)
Distinguish between the nominal interest rate and the real interest rate.
▪ The real interest rate is the nominal interest rate minus the inflation rate.
9.7 Does Inflation Impose Costs on the Economy? (pages 302–306)

Discuss the problems that inflation causes.
▪ When the inflation rate is different from the expected inflation rate some people gain and
some people lose.
Copyright © 2019 Pearson Education, Inc.

CHAPTER 9 | Unemployment and Inflation 195
Key Terms
Consumer price index (CPI), p. 296. A Labor force participation rate, p. 282. The
measure of the average of the prices a typical percentage of the working-age population in the
urban family of four pays for the goods and labor force.
services they purchase.
Menu costs, p. 303. The costs to firms of
Cyclical unemployment, p. 291. Unemployment changing prices.
caused by a business cycle recession.
Natural rate of unemployment, p. 292. The
Deflation, p. 302. A decline in the price level. normal rate of unemployment, consisting of
frictional unemployment and structural
Discouraged workers, p. 281. People who are unemployment.
available for work but have not looked for a job
during the previous four weeks because they Nominal interest rate, p. 301. The stated
believe no jobs are available for them. interest rate on a loan.
Efficiency wage, p. 295. An above-market wage Price level, p. 295. A measure of the average
that a firm pays to increase workers’ prices of goods and services in the economy.
productivity.
Producer price index (PPI), p. 298. An average
Employed, p. 280. In government statistics, of the prices received by producers of goods and
someone who currently has a job or who is services at all stages of the production process.
temporarily away from his or her job.
Real interest rate, p. 301. The nominal interest
Employment-population ratio, p. 282. The rate minus the inflation rate.
percentage of the working-age population that is
employed. Structural unemployment, p. 291.
Unemployment that arises from a persistent
Frictional unemployment, p. 291. Short-term mismatch between the skills or attributes of
unemployment that arises from the process of workers and the requirements of jobs.
matching workers with jobs.
Unemployed, p. 280. In government statistics,
Inflation rate, p. 295. The percentage increase someone who is not currently at work but who is
in the price level from one year to the next. available for work and who has actively looked
for work during the previous month.
Labor force, p. 280. The sum of employed and
unemployed workers in the economy. Unemployment rate, p. 280. The percentage of
the labor force that is unemployed.
Chapter Outline
Why Would Boeing Cut Thousands of Jobs As the Economy Expands?
Boeing Company is one of the world’s largest manufacturers of commercial and military aircraft. During
recessions, air travel declines and airlines cut back on orders for new planes. The recession of 2001 caused a
decline of more than 50 percent of Boeing’s deliveries of planes. As a result, the firm laid off 30,000
workers. The recession of 2007–2009 caused Boeing to lay off 7,000 workers. By 2015, Boeing’s deliveries
of planes reached a new peak, before declining again in 2016. Boeing faced three challenges. First, it had to
cut prices to compete with rival firms such as Airbus Group and Bombardier. Second, Airbus had made
improvements to its competing A320 model and began winning a majority of new orders for jetliners. Third,
cuts to military spending harmed sales in Boeing’s defense and space unit.

196 CHAPTER 9 | Unemployment and Inflation
Measuring the Unemployment Rate, the Labor Force Participation Rate,

9.1 and the Employment-Population Ratio (pages 280–290)
Learning Objective: Define the unemployment rate, the labor force participation rate,
and the employment-population ratio and understand how they are computed.
A. The Household Survey
Each month the U.S. Bureau of the Census conducts the Current Population Survey to collect data needed
to compute the monthly unemployment rate. The Department of Labor’s Bureau of Labor Statistics (BLS)
uses these data to calculate the unemployment rate. In government statistics, an employed person is
someone who currently has a job or is temporarily away from his or her job. An unemployed person is
someone who is not currently at work but who is available for work and who has actively looked for work
during the previous month.
The labor force is the sum of employed and unemployed workers in the economy. The unemployment
rate is the percentage of the labor force that is unemployed. Discouraged workers are people who are
available for work but have not looked for a job during the previous four weeks because they believe no
jobs are available for them. The labor force participation rate is the percentage of the working-age
population in the labor force. The employment-population ratio is the percentage of the working-age
population that is employed.
B. Problems with Measuring the Unemployment Rate

The unemployment rate is not a perfect measure of the current state of joblessness. During a recession, an
increase in the number of discouraged workers occurs, but these workers are not counted as unemployed.
The BLS counts people as employed if they hold part-time jobs even though they would prefer to hold
full-time jobs. There are other problems that cause the measured unemployment rate to overstate the
extent of joblessness. The survey used to measure the unemployment rate does not verify the responses of
people included in the survey. A person might claim to be actively looking for a job to remain eligible for
government programs. Other people might be employed but engaged in illegal activity or might want to
conceal a legitimate job to avoid paying taxes.
C. Trends in Labor Force Participation

The labor force participation rate determines the amount of labor that will be available to the economy
from a given population. The higher the labor force participation rate, the more labor will be available and
the higher a country’s level of GDP. The labor force participation rate of adult men has declined gradually
since 1948, but the labor force participation rate of adult women has increased sharply. The overall labor
force participation rate rose from 59 percent in 1948 to 63 percent in 2016.
D. Unemployment Rates for Different Groups

Different groups in the population can have very different unemployment rates. In April 2017, Asians had a
lower unemployment rate, and African Americans had a higher unemployment rate, than the overall rate.
E. How Long Are People Typically Unemployed?

In the modern U.S. economy, the typical unemployed person stays unemployed for a relatively brief
period of time, although that time lengthens significantly during a recession.
F. The Establishment Survey: Another Measure of Employment

The BLS uses the establishment survey, sometimes called the payroll survey, to measure total
employment in the economy. This monthly survey samples about 300,000 business establishments to
provide information on the total number of persons who are employed and on a company payroll. Despite
some drawbacks, the establishment survey has the advantage of being determined by actual payrolls. In
recent years, some economists have come to rely more on establishment survey data than on household
survey data in analyzing current labor market conditions.

G. Revisions in the Establishment Survey Employment Data: How Bad Was the
2007–2009 Recession?
To avoid long waits in supplying data, such as the employment data from the establishment survey, to
policymakers and the general public, government agencies typically issue preliminary estimates that they
revise as additional information becomes available.
H. Job Creation and Job Destruction over Time

The U.S. economy creates and destroys millions of jobs every year. The creation and destruction of jobs
result from changes in consumer tastes, technological progress, and the successes and failures of
entrepreneurs in responding to the opportunities and challenges of shifting consumer tastes and
technological change. When the BLS announces the increases or decreases in the number of people
employed and unemployed each month, these are net figures.
Teaching Tips
The end of the chapter in the main text includes a special category of exercises titled Real-Time Data
Exercises (RTDA). These exercises help students become familiar with a key data source, learn how to
locate data, and develop skills in interpreting data. Those exercises marked with a red circle allow
students and instructors to use the latest data from the Web site of the Federal Reserve Bank of St. Louis
(FRED). Many RTDA exercises require more elaborate calculations than other problems as well as the
use of Excel spreadsheets.
Extra
How Unusual Was the Unemployment Situation Following the
Apply the
2007–2009 Recession?
Concept
The Great Depression of the 1930s left its mark on nearly everyone who lived through it. The Depression
began in August 1929, became worse after the stock market crash in October 1929, and reached its lowest
point in 1933, following the collapse of the banking system. Real GDP fell by more than 25 percent
between 1929 and 1933—the largest decline ever recorded. The unemployment rate in 1933 was above 20
percent—the highest rate ever recorded. The unemployment rate did not return to its 1929 level until
1942, the year after the United States entered World War II. With the unemployment rate so high for so
long, many people were out of work for years. As one historian put it: “What was distinctive about the
Great Depression, in fact, was . . . the extraordinary lengths of time that most jobless men and women
remained out of work.”
By the 2000s, many people in the United States, including most economists and policymakers, believed
that prolonged periods of unemployment such as the U.S. economy had suffered from during the 1930s
were very unlikely to happen again. Although the 1981–1982 recession had been severe and the
unemployment rate had risen above 10 percent for the first time since the 1930s, the recovery was strong,
and many unemployed workers found new jobs relatively quickly. So, following the 2007–2009
recession, most economists and policymakers were unprepared for how slowly the unemployment rate
declined and for how much the average period of unemployment rose. During the 1981–1982 recession,
the unemployment rate peaked at 10.8 percent in December 1982, but 18 months later, in June 1984, it
had already declined to 7.2 percent. In contrast, after the recession of 2007–2009, the unemployment rate
peaked at 10.0 percent in October 2009, while 18 months later it had declined by only 1 percentage point
to 9.0 percent. The following figure shows that the average period of unemployment was twice as high
following the 2007–2009 recession as following any other recession since the end of World War II.

Unemployment was so persistent and widespread that a survey taken by the Pew Research Center in the
spring of 2011 found that more than half of all households had experienced at least one member losing his
or her job during the previous year. Another Pew survey taken in June 2011 found that more than half of
people with jobs expected to receive a pay cut or to lose their job during the next year. As we have seen,
one drawback to the unemployment data is that workers who drop out of the labor market are no longer
counted by the BLS as unemployed. As a result, some economists focus on the employment–population
ratio because it measures the fraction of the population that has jobs. The following figure shows the
employment–population ratio for the period from 1948 through mid-2013. The overall upward trend of
the ratio reflects the increased labor force participation rate of women. In each recession, the
employment–population ratio falls as some workers lose their jobs. The fall of the employment–
population ratio was particularly dramatic during the recession of 2007–2009, and the ratio was actually
even lower four years after the end of the recession. The fall of the employment–population ratio may be
the best indication of how weak the U.S. labor market was during and after the 2007–2009 recession.
As we will see in later chapters, explaining the weakness of the U.S. labor market during these years had
become a top priority of economists and policymakers.
Sources: Alexander Keyssar, Out of Work: The First Century of Unemployment in Massachusetts, New York: Cambridge University
Press, 1986, p. 290; Federal Reserve Bank of St. Louis; U.S. Bureau of Labor Statistics; Pew Research Center, “The Recession,
Economic Stress, and Optimism,” May 4, 2011; and Pew Research Center, “Views of Personal Finances,” June 23, 2011.

Question
An article published in the New York Times in July 2011 argued: “For the second straight year, the
recovery in the job market has essentially stalled. This chart, showing the share of adults with jobs, offers
the best summary you’ll find.” The “share of adults with jobs” is known more formally as the
employment–population ratio. Why might the employment–population ratio provide the “best summary”
of the state of the job market rather than the unemployment rate?
Source: David Leonhardt, “Overly Optimistic, Once Again,” New York Times, July 8, 2011.
Answer
A weakness of the unemployment rate is that it does not count as unemployed those workers who drop
out of the labor force. As a result, some economists focus on the employment-population ratio because it
measures the fraction of the working-age population that has jobs.
Types of Unemployment (pages 290–293)

9.2 Learning Objective: Identify the three types of unemployment.
A. Frictional Unemployment and Job Search

Most workers spend time engaging in a job search, and most firms spend time searching for people to fill
job openings. Frictional unemployment is short-term unemployment that arises from the process of
matching workers with jobs. There will always be some workers who are frictionally unemployed
because they are between jobs and in the process of searching for new ones. Some unemployment is due
to seasonal factors, such as weather or fluctuations in demand during different times of the year. Seasonal
unemployment refers to unemployment due to factors such as weather, variations in tourism, and other
calendar-related events.
B. Structural Unemployment
Structural unemployment is unemployment that arises from a persistent mismatch between the skills or
attributes of workers and the requirements of jobs. This type of unemployment can last for longer periods
than frictional unemployment because workers need time to learn new skills.
C. Cyclical Unemployment
When the economy moves into recession, many firms find their sales falling and cut back on production.
As production falls, firms lay off workers. Cyclical unemployment is unemployment caused by a
business cycle recession.
D. Full Employment
The natural rate of unemployment is the normal rate of unemployment, consisting of frictional
unemployment and structural unemployment. The natural rate of unemployment is also called the full-
employment rate of unemployment.
Teaching Tips
Though categorizing unemployment as frictional, structural, or cyclical is useful in understanding the
sources of unemployment, the Bureau of Labor Statistics provides estimates of total unemployment. It
does not classify unemployment as frictional, structural, or cyclical.

Extra Solved Problem 9.2

Reasons for Unemployment
Some of the data the Bureau of Labor Statistics collects regarding the reasons people are unemployed
appear in the following table (numbers are in thousands, seasonally adjusted).
Unemployment Reason for Unemployment

Job Losers
Rate On Job New
Year (%) Number Total Layoff Other Leavers Reentrants Entrants
2008 5.8 8,924 4,789 1,176 3,614 896 2,472 766
2009 9.3 14,265 9,160 1,630 7,530 882 3,187 1,035
2010 9.6 14,825 9,250 1,431 7,819 889 3,466 1,220
2011 8.9 13,747 8,106 1,230 6,876 956 3,401 1,284
2012 8.1 12,506 6,877 1,183 5,694 967 3,345 1,316
2013 7.4 11,460 6,073 1,136 4,937 932 3,207 1,247
2014 6.2 9,617 4,878 1,007 3,831 824 2,829 1,086
Source: U.S. Department of Labor, Bureau of Labor Statistics. www.bls.gov
a. Calculate the percentage of the unemployed who lost their jobs (Job Losers) and the percentage
that left their jobs (Job Leavers) from 2008 to 2014.
b. Calculate the percentage of the unemployed who were unemployed as the result of entering the
labor force, either for the first time or as reentrants, from 2008 to 2014.
Solving the Problem

Step 1: Review the chapter material.
This problem is about the sources of unemployment, so you may want to review the section
“Types of Unemployment,” which begins on page 674 in the textbook.
Step 2: Calculate the percentage of the unemployed who lost their jobs and the percentage
that left their jobs from 2008 to 2014.
The percentage of “job losers,” for example in 2008, can be calculated as (4,789/8,924)  100 =
53.7 percent. The percentages for each year are in the second column (Job Losers) of the
following table. The percentage of “job leavers” can be calculated for 2008 as (896/8,924) 
100 = 10.0 percent. The percentages for each year are in the third column (Job Leavers) of the
following table.
Percentage of The Unemployed

Reentrants and
Year Job Losers Job Leavers New Entrants
2008 53.7 10.0 36.3
2009 64.2 6.2 29.6
2010 62.4 6.0 31.6
2011 60.2 7.1 34.8
2012 55.0 7.7 37.3
2013 53.0 8.1 38.9
2014 50.7 8.6 40.7

Step 3: Calculate the percentage of the unemployed who were unemployed as the result
of entering the labor force from 2008 to 2014.
The percentage of reentrants and new entrants for 2008 is [(2,472 + 766)/8,924]  100 = 36.3
percent. The percentages for each year are included final column in the above table. The main
source of unemployment is job losers, followed by reentrants and new entrants. There were
more reentrants—people who lost or quit jobs in the past, dropped out of the labor force and
are now looking for new jobs—than new entrants to the labor force.
Explaining Unemployment (pages 293–295)

9.3 Learning Objective: Explain what factors determine the unemployment rate.
A. Government Policies and the Unemployment Rate

Governments can reduce the level of frictional unemployment with policies that speed up the process of
matching unemployed workers with unfilled jobs. Governments can help reduce structural unemployment
with policies that aid worker retraining. Some government policies, however, can add to the level of
frictional and structural unemployment. In the United States and most industrial countries, the
unemployed are eligible for unemployment insurance payments. The unemployed spend more time
searching for jobs because they receive these payments. Unemployment insurance helps the unemployed
maintain their income and spending, which lessens the personal hardship of being unemployed. In the
United States, unemployed workers are typically eligible to receive unemployment insurance payments
equal to about half of their previous wage for six months, although this period is often extended during
recessions. In many other countries workers are eligible to receive unemployment payments for a year or
more, and payments may equal 70 percent of their previous wage.
In 1938, the federal government enacted a minimum-wage law. If the minimum wage is set above the
market wage, the quantity supplied of labor will be greater than the quantity of labor demanded. As a result,
the unemployment rate will be higher than it would be without the minimum wage. Studies estimate that a
10 percent increase in the minimum wage reduces teenage unemployment by about 2 percent.
B. Labor Unions
Labor unions are organizations of workers that bargain with employers for higher wages and better
working conditions for their members. In unionized industries, the wage is usually above what otherwise
would be the market wage, but most economists believe that this does not result in an increase in the
overall unemployment rate because only about 6.5 percent of workers outside the government sector are
unionized.
C. Efficiency Wages
An efficiency wage is an above-market wage that a firm pays to increase workers’ productivity.
Efficiency wages are another reason economies experience some unemployment even when cyclical
unemployment is zero.

The Graying of the Unemployment Rate
The unemployment rate changes not only as the number of unemployed workers changes (the numerator
of the unemployment rate formula) but also as the size of the labor force changes (the denominator of the
unemployment rate formula). As the textbook notes, there has been a dramatic increase in the number of
women in the labor force since the late 1940s. The participation rate among adult women increased from

33 percent in 1948 to 57 percent in 2016. In the early part of the twenty-first century, the labor force will
be affected by the aging of the “baby boomers”—Americans born between 1946 and 1964. According to
the U.S. Census Bureau by 2050 the number of Americans aged 65 and older is expected to rise to 83.7
million from about 47.8 million in 2015. Despite improvements in health care and the increased life
expectancy of Americans, many older workers are leaving the labor force. In 1960, 78 percent of men
between the ages 60 and 64 and 31 percent of men 65 years and older were in the labor force. Today these
figures are about 55 percent and 17 percent, respectively. The average age of retirement today is 62,
compared to an average age of 65 in 1965.
There are several reasons why many workers today retire earlier than in years past. First, many boomers
have greater disposable incomes than people in other age groups and choose to use this income to
consume more leisure. Second, career advancement becomes more difficult after age 40. Third, over
60 percent of U.S. corporations offer older workers early retirement plans, while only about 5 percent
offer incentives to delay retirement. If these trends continue, the disappearance of baby boomers from the
labor force will have a significant impact on the size of the labor force.
a. What effect will the retirement of the baby boomers have on the unemployment rate?
b. Can the size of the labor force increase despite of the retirement of older workers?
Solving the Problem

This problem is about factors that determine the unemployment rate, so you may want to
review the section “Explaining Unemployment,” which begins on page 677 in the textbook.
Step 2: What effect will the retirement of baby boomers will have on the unemployment
rate?
Holding other factors that affect the labor force constant, as baby boomers retire, the
unemployment rate will rise because the numerator of the unemployment rate formula would
not change much (relatively few baby boomers are unemployed), while the denominator
becomes smaller as the labor force declines.
Step 3: Explain whether the size of the labor force can increase despite the retirement of
older workers.
It is possible, but unlikely, that the labor force will increase due to the retirement of older
workers, because the birth rate in the 1980s and 1990s was less than in the 1950s and 1960s.
To offset the decline in the labor force due to the retirement of the baby boomers, there would
have to be new job seekers—either immigrants or current U.S. residents who had not been in
the labor force.
Measuring Inflation (pages 295–298)

9.4 Learning Objective: Define the price level and the inflation rate and understand how
they are computed.
The price level is a measure of the average prices of goods and services in the economy. The inflation
rate is the percentage increase in the price level from one year to the next. The GDP deflator is the
broadest measure of the price level, but to know the impact of inflation on the typical household, the
deflator can be misleading. Changes in the consumer price index come closest to measuring changes in
the cost of living as experienced by the typical household.

A. The Consumer Price Index

To obtain prices of a representative group of goods and services, the BLS surveys 14,000 households on
their spending habits. The survey is used to construct a market basket of 211 types of goods and services
used by the typical urban family of four. The consumer price index (CPI) is a measure of the average of
the prices a typical urban family of four pays for the goods and services they purchase. One year is chosen
as the base year, and the value of the CPI is set equal to 100 for that year. In any other year the CPI equals
the ratio of the dollar amount necessary to buy the market basket in that year divided by the dollar amount
necessary to buy the market basket in the base year, multiplied by 100. The CPI is sometimes called the
cost-of-living index.
B. Is the CPI Accurate?

The CPI is the most widely used measure of inflation. It is important that the CPI be as accurate as
possible, but there are four biases that cause the CPI to overstate the true inflation rate: substitution bias,
increase in quality bias, new product bias, and outlet bias. The BLS takes steps to reduce the size of the
bias.
C. The Producer Price Index

In addition to the GDP deflator and the CPI, the government also computes the producer price index
(PPI), which is an average of the prices received by producers of goods and services at all stages of the
production process. Changes in the PPI can give an early warning of future movements in the CPI.

Calculating the CPI
The consumer price index (CPI) compares the cost of a market basket of goods in a given year with the
cost of the same market basket in the base year. Suppose that a market basket includes (1) admission for
two to a local theater for a weekend movie, (2) a large box of popcorn at the theater, (3) a large pepperoni
pizza (carry-out from a local pizzeria), and (4) a two-liter bottle of diet Coke.
Theatre
Admission
for One Diet
Year Person Popcorn Pizza Coke
1 $5.00 $2.00 $12.00 $1.25
2 6.00 2.50 12.50 1.40
3 6.50 3.00 13.00 1.50
Assume that Year 1 is the base year. Calculate the value of the CPI for each year and the rate of inflation
for Years 2 and 3.
Solving the Problem

This problem is about using the CPI to calculate the inflation rate, so you may want to review
the section “Measuring Inflation,” which begins on page 679 in the textbook.

Step 2: Determine the value of the market basket.

The value of the market basket is the sum of the quantity of each good included in the basket
multiplied by its price. The market basket in this example has a quantity of two for theater
admissions, and a quantity of one for each of the other goods. The value of the market basket
in Year 1, the base year, is (2  $5.00) + $2.00 + $12.00 + $1.25 = $25.25. The table in Step
3 lists the value of the market basket for all three years.
Step 3: Calculate the value of the CPI and the inflation rates for Years 2 and 3.
The CPI is the ratio of the value of the market basket in a given year to the value of the
market basket in the base year, multiplied by 100. We can use the CPI to calculate the
inflation rate, which is the percentage change in the CPI from Year 1 to Year 2 and from Year
2 to Year 3. These values are in the following table:
Value of the
Market Rate of
Year Basket CPI Inflation
1 $25.25 100.0 —
2 28.40 112.5 12.5%
3 30.50 120.8 7.4%
Extra
Explaining How the CPI Measures the Price Level and Rate of
Apply the
Inflation
Concept
There are many misconceptions about how the consumer price index (CPI) is constructed and exactly
what it measures. Economists John Greenlees and Robert McCelland addressed these misconceptions in
an article published in the Monthly Labor Review. They explain that “…when prices change, the goal of
the CPI is to measure the percentage by which consumers would have to increase their spending to be as
well off with the new prices as they were with the old prices…” The following information regarding the
CPI and its construction are taken from the Greenlees and McCelland article.
Since 1978, the Bureau of Labor Statistics (BLS) has published the CPI for all urban consumers (CPI-U)
and the CPI for urban wage earners and clerical workers (CPI-W). Though the items and prices included
in both indexes are the same, the weights given to some of the index components differ. The U.S. Census
Bureau administers a Telephone Point-of-Purchase Survey in which consumers are asked where they
recently purchased goods and services. The BLS uses these data to select a sample of grocery stores,
service stations, doctors’ offices and other locations at which to collect prices. Representative samples of
items from these locations are selected and prices of the items are collected regularly by BLS employees.
Individual item-area indexes are constructed and the indexes are averaged together using weights based
on the Consumer Expenditure Survey, which is conducted for the BLS by the Census Bureau.
The all-items CPI-U is the CPI that is reported most widely, but the CPI-U and the CPI-W are both used
to make cost-of-living adjustments. The CPI-W is the index used to make annual Social Security and
federal retirement cost-of-living adjustments and is often used for periodic wage adjustments in collective
bargaining agreements. The CPI-U is used for indexation of tax brackets and personal exemption amounts
in the federal tax system. CPI data are also used in the construction of the National Income and Products
Accounts (NIPA). For example, CPI component indexes are inputs into the NIPA Personal Consumption
Expenditures (PCE) price index and are used in the calculation of real GDP.

In 2002, the BLS began publishing the chained Consumer Price Index for urban consumers (C-CPI-U).
This more closely approximates a cost-of-living index by reflecting consumer substitution among item
categories. Over time, some goods and services consumers commonly bought are replaced by new goods
and services. Adjustments to the CPI must be made to avoid having a shrinking market basket that is
unrepresentative of what consumers are buying. For many food items, the substitution is facilitated
because the BLS measures prices on a per-ounce or per-pound basis, rather than a per-item, basis.
Greenlees and McCelland use a simple example of a maker of a candy bar that replaces a 1-ounce bar
with a 1.5-ounce bar that sells for the same 75 cent price. The BLS would record a 50 percent increase in
price rather than recording that the price of the bar had not changed. More complicated adjustments are
required when an item, such as a standard-definition television set, is replaced in a store by a high-
definition set that has a much higher price, but also higher quality. The BLS uses sophisticated techniques
to estimate how much of the price difference is due to the higher quality of the set, rather than an increase
in price for a given quality.
Source: John S. Greenlees and Robert B. McCelland, “Addressing misconceptions about the Consumer Price Index,” Monthly
Labor Review, August 2008, pp. 3–19.
Using Price Indexes to Adjust for the Effects of Inflation (pages 298–300)
9.5 Learning Objective: Use price indexes to adjust for the effects of inflation.
Price indexes give us a way of adjusting for the effects of inflation so that we can compare dollar values
from different years. To correct for the effects of inflation, we divide a nominal variable by a price index
and multiply by 100 to obtain a real variable. Economic variables that are calculated in current-year
prices are referred to as nominal variables.

Calculating Real Wages at Caterpillar
In 2013, Caterpillar and the United Steelworkers Union signed a labor contract that froze the wages of
caterpillar workers for six years. In 2013, the average wage at Caterpillar was about $27 per hour and the
CPI was 233. Suppose the CPI rises to 260 in 2018, the last year of the contract. Calculate the percentage
change between 2013 and 2018 in the real wage earned by an average Caterpillar worker. Be sure to
explain what the values you calculate for the real wage represent.
Solving the Problem

This problem is about using price indexes to correct for the effects of inflation, so you may
want to review the section “Using Price Indexes to Adjust for the Effects of Inflation” that
begins on page 682 in the textbook.
Step 2: Begin by defining the real wage in 2013 and 2018 and explaining what the
values of the real wage represent.
The number of dollars a worker receives is the worker’s nominal wage. To calculate the
worker’s real wage, we have to divide the nominal wage by the CPI for that year and multiply
by 100. We can make the following calculations for the two years:

For 2013:
 $27 
   100 = $11.59
 233 
For 2018:
 $27 
   100 = $10.38
 260 
The base year for the CPI is the average of prices during the period 1982–1984. So, the
values for the real wage we calculated are in 1982–1984 dollars. In other words, these values
for the real wage tell us that in 2013, $27 would buy what $11.59 would have bought in
1982–1984, and that in 2018, $27 would buy what $10.38 would have bought in 1982–1984.
Step 3: Complete the answer by calculating the percentage change in the real wage
Caterpillar workers will receive.
This percentage change equals:
 $10.38 − $11.59 
   100 = −10.4%.
 $11.59 
We can conclude that if the estimate of the CPI in 2018 is correct, an average Caterpillar worker
will experience about a 10 percent decline in his or her real wage between 2013 and 2018.
Extra Credit: The values we computed for the real wages Caterpillar workers earn are measured in
1982–1984 dollars. Because this period is more than 30 years ago, the values are somewhat difficult to
interpret. We can convert the earnings to 2013 or 2018 dollars by using the method we used earlier to
calculate your mother’s salary. But notice that, for purposes of calculating the change in the value of real
average hourly earnings over time, the base year of the price index doesn’t matter. The change from 2013
to 2018 would still be −10.4 percent, no matter what the base year of the price index was. If you don’t see
that this is true, test it by using the mother’s salary method to calculate the real wage for 2013 and 2018 in
2013 dollars. Then calculate the percentage change. Unless you make an arithmetic error, you should find
that the answer is still −10.4 percent.
Question
In 1924, the famous novelist F. Scott Fitzgerald wrote an article for the Saturday Evening Post titled
“How to Live on $36,000 a Year,” in which he wondered how he and his wife had managed to spend all
of that very high income without saving any of it. The CPI in 1924 was 17, and the CPI in 2012 was 230.
What income would you have needed in 2012 to have had the same purchasing power that Fitzgerald’s
$36,000 had in 1924? Be sure to show your calculation.
Source: F. Scott Fitzgerald, “How to Live on $36,000 a Year,” Saturday Evening Post, April 5, 1924.
Answer
We can convert Fitzgerald’s 1924 nominal income of $36,000 to an equivalent income in 2012 by
multiplying the 1924 nominal income by the ratio of the CPI for 2012 to the CPI for 1924: $36,000 ×
(230/17) = $487,059. So, you would have needed an income of $487,059 in 2012 to have the same
purchasing power that Fitzgerald’s $36,000 had in 1924.

Nominal Interest Rates versus Real Interest Rates (pages 301–302)

9.6 Learning Objective: Distinguish between the nominal interest rate and the real interest rate.
The difference between nominal and real values is important when money is being borrowed and lent.
Because it is corrected for the effects of inflation, the real interest rate provides a better measure of the
true cost of borrowing and the true return to lending than does the nominal interest rate. The nominal
interest rate is the stated interest rate on a loan. The real interest rate is the nominal interest rate minus
the inflation rate. For the economy as a whole, we can measure the nominal interest rate as the interest
rate on three-month U.S. Treasury bills. The nominal interest rate will be less than the real interest rate
when the inflation rate is negative. Deflation is a decline in the price level.

Computing the Real Rate of Interest
The real interest rate is defined as the nominal interest rate minus the inflation rate. The textbook uses the
three-month interest rate on U.S. Treasury bills (short-term loans investors make to the federal
government) as a measure of the nominal interest rate. The table below contains the average annual
interest rate on three-month Treasury bills (T-bills) and the percentage change in the consumer price
index (CPI-U) for 1981, 1984, and 1985 (years of relatively high nominal interest rates) and 2014, 2015
and 2016 (years of relatively low nominal interest rates).
1981 1984 1985 2014 2015 2016

Interest rate on three-month T-bills 14.03 9.52 7.48 0.03 0.05 0.32
Percentage change in the CPI-U 10.38 4.37 3.53 1.61 0.12 1.28
Source: https://fred.stlouisfed.org/
a. What was the real interest rate in the years 1981, 1984, 1985, 2014, 2015, and 2016?
b. In which of these years was the real interest highest? In which years was the real interest rate
negative?
Solving the Problem

This problem refers to real and nominal interest rates, so you may want to review the section
“Nominal Interest Rates versus Real Interest Rates,” which begins on page 678 of the textbook.
Step 2: Calculate the real interest rate for the years 1981, 1984, 1985, 2014, 2015, and 2016.
Real interest rates for the given years are
1981 1984 1985 2014 2015 2016
3.65 5.15 3.95 −1.58 −.07 −0.96
Step 3: In which of these years was the real interest rate highest? In which years was the
real interest rate negative?
The real interest rate was highest, 5.15 percent, in 1984 and was negative in 2014, 2015, and
2016. A negative real interest rate means that lenders are receiving a negative real return on
funds they have loaned. Eventually, nominal interest rates must rise to make the real interest
rate positive. At some point investors will demand a positive interest rate in order to convince
them to keep buying Treasury bills.

Extra
Low Real Interest Rates on Treasury Debt Force Investors to
Apply the
Consider Alternatives
Concept
The federal government’s deficit declined from $1.4 trillion in fiscal year (October 1–September 30) 2009
to $439 billion in fiscal year 2015. Although the size of deficit fell, the total national debt climbed to over
$19 trillion in 2016. The U.S. Treasury has to sell hundreds of billions of dollars in securities annually to
pay interest on this debt. Holding the demand constant, an increase in supply of Treasury securities will
lead to lower prices and higher interest rates. But because the demand for Treasury securities also
increased, interest rates remained low throughout 2015. Low real interest rates encourage firms and
consumers to borrow to fund construction of new buildings, equipment and purchases of automobiles and
other durable goods. But bondholders and retirees who seek steady income view low real interest rates on
Treasury securities differently. William Gross, cofounder of PIMCO, the world’s largest bond fund
advised bondholders to “. . . find something else that’s attractive.” While Princeton economist Burton
Malkiel agreed that U.S. Treasury securities are currently poor choices for investors, he endorsed two
other types of bonds: (1) Tax-exempt municipal bonds, issued by state and local governments, that offer
yields higher than those on Treasury debt, some of which are tied to reliable sources of revenue (for
example, bridge and tunnel fees) and are free of state and local taxes and (2) bonds issued by foreign
countries that are in better fiscal condition than the United States. Australia, for example, has a low debt-
to-GDP ratio and abundant natural resources that can be used to fuel economic growth. Malkiel suggests
that another strategy for savers: buy a portfolio of blue-chip common stocks that offer dividends.
Sources: Matt Phillips, “Real Interest Rates: 1919–The Present,” Wall Street Journal, October 13, 2011; Burton G. Malkiel, “The
Bond Buyer’s Dilemma,” Wall Street Journal, December 7, 2011; Matt Cover, “At Current Rate of Federal Borrowing,
Government on Track to Hit Legal Limit on National Debt on March 14,” cnsnews.com, February 24, 2011; and “U.S. deficit
falls to $680 billion,” CNNMoney, October 30, 2013.
Does Inflation Impose Costs on the Economy? (pages 302–306)

9.7 Learning Objective: Discuss the problems that inflation causes.
A. Inflation Affects the Distribution of Income

Although inflation does not reduce the affordability of goods and services to the average consumer, it still
imposes costs on the economy. Inflation affects the distribution of income. Some people will find their
incomes rising faster than the rate of inflation, and so their purchasing power will rise. Other people will
find their incomes rising slower than the rate of inflation, so their purchasing power will fall. The extent
to which inflation redistributes income depends, in part, on whether the inflation is anticipated.
B. The Problem with Anticipated Inflation

When inflation is anticipated, its main cost is that paper money loses value. Anyone holding paper money
will find its purchasing power decreasing each year by the rate of inflation. To avoid this cost, workers
and firms try to hold as little money as possible. Firms that print catalogs listing prices of products will
have to reprint them more frequently. Stores will devote more time and labor to changing prices. Menu
costs are the costs to firms of changing prices. Anticipated inflation raises taxes paid by investors because
they are taxed on the nominal payments they receive rather than on the real payments.
C. The Problem with Unanticipated Inflation

When people borrow money or banks lend money, they must forecast the rate of inflation so they can
calculate the real rate of interest on a loan. When the actual inflation rate turns out to be different from the
expected rate, some people gain while other people lose. This apparently unfair redistribution is a key
reason why people dislike unanticipated inflation.

Extra Economics in Your Life & Career:

How will the real interest rate affect the cost of your car loan?
Let’s assume that the old clunker you have been driving needs $500 in repairs in order to pass an annual
car inspection. You are considering buying a new car, and you contact car dealers and banks to determine
the best deal you can get on a car loan. Assume two different scenarios: (a) The lowest interest rate you
find on a five-year car loan is 10 percent, and the annual rate of inflation for the next five years will be
9 percent. (b) The lowest interest rate you can find on a five-year car loan is 6 percent, and the annual rate
of inflation for the next five years will be 1 percent.
Question: Under which scenario—(a) or (b)—will you pay less, in real income, for your car loan?
Answer: Although the nominal interest rate is much lower under scenario (a), you should base your
decision on the real interest rate. Of course, you will not know what the actual rate of inflation will be in
the future, but if the rate of inflation is 9 percent annually, the real rate of interest on your car loan will be
only 1 percent. Under scenario (b), if the annual rate of inflation is 1 percent over the duration of your
loan the real rate of interest will be 5 percent. You will pay less in real income under scenario (a) even
though the nominal interest rate is much higher than it is under scenario (b).
Extra AN INSIDE LOOK News Article to Use in Class

Visit www.myeconlab.com for current An Inside Look news articles.

Solutions to End-of-Chapter Exercises

Measuring the Unemployment Rate, the Labor Force Participation Rate,
9.1 and the Employment-Population Ratio
Learning Objective: Define the unemployment rate, the labor force participation rate,
and the employment-population ratio and understand how they are computed.
Review Questions
1.1 The unemployment rate is calculated monthly from data gathered by the U.S. Bureau of the
Census in its household survey. The unemployment rate equals the percentage of the labor force
that is unemployed: (Unemployed/Labor Force) × 100. The three conditions to be counted as
unemployed are a person: (1) did not work in the previous week, (2) was available for work, and
(3) actively looked for work at some time during the previous four weeks.
1.2 The official Bureau of Labor Statistics (BLS) measure of the unemployment rate understates the
true degree of unemployment to the extent that it does not count discouraged workers as
unemployed because they have stopped looking for a job, and it counts involuntary part-time
workers as employed even though these workers would prefer to work more hours. The official
BLS measure overstates the true degree of unemployment because (1) some people claim to be
actively looking for work but are not so they can remain eligible for government payments to the
unemployed and (2) some people have jobs in the underground economy although they claim to
be unemployed.
1.3 African Americans and Hispanics tend to have above-average unemployment rates, and whites
and Asians tend to have below-average unemployment rates. High school dropouts and high
school graduates tend to have above-average unemployment rates, and college graduates tend to
have below-average unemployment rates.
1.4 The labor force participation rate measures the percentage of the working-age population that is in
the labor force: (Labor Force/Working-Age Population) × 100. Since 1950, the labor force
participation rate for men has gradually declined, while the rate for women has significantly
increased. The overall labor force participation was higher in 2016 than in 1950. In recent years, the
decline in the labor force participation rate of prime-age males has been a policy concern. The labor
force participation rate for women has declined somewhat since the 2007–2009 recession.
1.5 The employment-population ratio measures the percentage of the working-age population that is
employed: (Employment/Working-Age Population) × 100. An unemployed person dropping out of
the labor force would decrease the unemployment rate, but it would not change the employment-
population ratio.
1.6 The household survey is a sample of 60,000 households chosen to represent the U.S. population
and provides information on the employment status of everyone in the household 16 years of age
and older. The establishment survey is a sample of 300,000 business establishments and gathers
information on the total number of people who are employed and on a company payroll. The
household survey includes information on both employment and unemployment, while the
establishment survey includes information only on employment. Many economists prefer the
establishment survey because it is based on actual payrolls, rather than on unverified answers as
in the household survey.

Problems and Applications

1.7
Working-age population 254,048,202
Employment 152,528,000
Unemployment 7,522,367
Unemployment rate 4.7%
Labor force 160,050,367
Labor force participation rate 63.0%
Employment-population ratio 60.0%
The number of people unemployed can be found using the definition that the unemployment rate
equals the number of unemployed divided by the sum of the number of unemployed and the
number of employed: 0.047 = [Unemployed/(Unemployed + 152,528,0000)]. The labor force
equals the employed plus the unemployed: 152,528,000 + 7,522,367 = 160,050,367. The
working-age population can be found using the definition that the labor force participation rate
equals the labor force divided by the working-age population: 0.63 = (160,050,367/Working-age
Population). The employment-population ratio equals the number of employed divided by the
working-age population: [(152,528,000/254,048,202) x 100].
1.8 Including homemakers as employed would decrease the unemployment rate because it increases
the size of the labor force but leaves unchanged the number of unemployed. Including
homemakers as employed would increase the labor force participation rate because it increases
the labor force but leaves unchanged the working-age population. Including homemakers would
increase the employment-population ratio because it increases the number of employed but does
not change the working-age population.
1.9 The formula for the unemployment rate is (Number of unemployed/Labor force) × 100. The labor
force is equal to the sum of the employed and the unemployed. Holding constant the number of
people employed from March to April 2017, an increase in the labor force participation rate would
mean the size of the labor force had increased, which could only have happened if the number of
people unemployed had increased. Both the numerator and the denominator in the above equation
for the unemployment rate would increase, but as we saw in Solved Problem 9.1 on page 660,
adding the same number to both the numerator and the denominator of a fraction that is less than
one increases the value of the fraction. Therefore, the unemployment rate would have been
greater than 4.4 percent in April 2017.
1.10 a. During an economic expansion we would expect that the number of jobs created to increase
as the economy expands, so the numerator of the employment-population ratio will increase
relative to the denominator, causing the ratio to increase.
b. As the unemployment rate decreased following the end of the 2007–2009 recession, the
employment-to-population “has increased far less…than the unemployment rate alone would
indicate” in part because during these years members of the baby boom generation began
retiring. But the employment-population ratio was also slow to recover for people 25 to 54
years of age, who typically are in the labor force. As the Apply the Concept on page 670
discusses, there are several reasons, including “labor market scarring,” an increase in the
number of people receiving Social Security Disability Insurance, the spread of licensing
requirements, the effects of the Affordable Care Act, increases in minimum wage laws, and
even improvements in videogames that help explain the slow recovery of the employment-
population ratio. A weakness of the unemployment rate is that it does not count as
unemployed those workers who drop out of the labor force. As a result, some economists
focus on the employment-population ratio because it measures the fraction of the working-
age population that has jobs.

1.11 The number of people in the labor force—the numerator of the labor force participation rate—
decreases as the number of employed workers decreases, but also as the number of people who are
counted as unemployed decreases. Employment can remain the same while the labor force
participation rate decreases if unemployment decreases. In the last three months of 2016, the
number of people employed stayed roughly the same while the number of people unemployed
decreased.
1.12 a. These workers are not counted as unemployed in the BLS data because they are no longer
actively looking for work.
b. The BLS will count these graduates as part of the labor force even if they don’t have jobs, so
long as they are actively looking for work.
1.13 The unemployment rate can increase while employment increases if the number of discouraged
workers and other people not previously counted as unemployed entering the labor force more
than offsets the effect of the employment increase. In this case, the number of people counted as
unemployed in Georgia was increasing faster than the increase in employment, causing the
unemployment rate to increase.
1.14 President Obama was referring to the net increase in jobs. The U.S. economy would have created
far more than 14 million jobs over the 70-month period, but it would have also destroyed many
jobs. There was a net increase of 14 million jobs.
9.2 Types of Unemployment

Learning Objective: Identify the three types of unemployment.
Review Questions
2.1 The three types of unemployment are frictional unemployment, structural unemployment, and
cyclical unemployment. Frictional unemployment is short-term unemployment that arises from the
process of matching workers with jobs. Structural unemployment is unemployment that arises from a
persistent mismatch between the skills and attributes of workers and the requirements of jobs.
Cyclical unemployment is unemployment caused by a business cycle recession. Cyclical
unemployment and structural unemployment result in greater hardship than frictional unemployment.
Frictional unemployment typically does not last as long as cyclical unemployment or structural
unemployment, and the frictionally unemployed do not need to retrain or relocate to find a job as the
structurally unemployed typically do.
2.2 Frictional unemployment arises from the process of matching workers with jobs. Because job
search takes time, there are always some workers who are frictionally unemployed because they
have begun a job search and have not yet found a job. The more difficult or lengthy the job search
process is, the greater the amount of frictional unemployment.
2.3 The natural rate of unemployment is the normal rate of unemployment, consisting of frictional
unemployment plus structural unemployment. The natural rate of unemployment is considered
the full-employment rate of unemployment.


2.4 The decline in employment at the Boeing Company between 1980 and 2017 was the result of a
combination of cyclical, frictional, and structural factors. Some of the decline in employment
would be cyclical because by 2017 the U.S. economy and the economies of other high-income
countries had still not fully recovered from the 2007 to 2009 recession. Some of the decline in
employment, though, was structural and resulted from a long-term decline in U.S. military
spending which had reduced demand for the products of Boeing’s defense and space unit.
Automation may also have resulted in the jobs of some workers now being carried out by
machines. Some of the decline in employment was likely frictional because Boeing was losing
sales to competing firms. Data on employment at Airbus and Bombardier, Boeing’s two main
rivals, could indicate what portion of the decline in employment at Boeing was frictional. Data on
the long-term decline in the aerospace industry worldwide could indicate the portion of the
decline in employment due to structural changes in the economy.
2.5 For someone frictionally unemployed, good advice would be to keep searching. The person has
the required skills, but matching worker skills to job openings takes time. For someone
structurally unemployed, advice should center on the need to retrain, find another occupation, or
possibly move to another part of the country where jobs that require the person’s skills are more
readily available. Someone cyclically unemployed should be advised to realize that the search
will take longer because of the recession, and to consider temporarily taking a lower-paying job
or going back to school until the economy improves.
2.6 a. Unemployment that results from job quits would be classified as frictional unemployment,
assuming that those who quit their jobs wish to remain in the labor force.
b. Assuming that those who quit their jobs wish to remain in the labor force, an increase in the
number of quits suggests that it is becoming easier to find jobs. Those who quit their jobs
must be confident that they will find other, better jobs.
2.7 The workers referred to in the article are likely to be structurally unemployed because they lack
the skills required for the available jobs or because they have addiction problems or other
personal troubles that make it difficult for them to remain employed.
2.8 a. The U-6 unemployment rate is a broader measure of the unemployment rate that shows what
the unemployment rate would be if the BLS counted as unemployed all people who were
available for work but not actively looking for jobs and all people who were in part-time jobs
but wanted full-time jobs. No measure of the unemployment rate fully describes the
conditions in the labor market. The U-6 measure offers a broader measure of conditions in the
labor market by including marginally attached workers (people who are available for work
but not actively looking for jobs) and involuntary part-time workers.
b. Full employment occurs when there is no cyclical unemployment and the only remaining
unemployment is structural and frictional unemployment. Even at full employment, the
economy still has frictional and structural unemployment and some workers who, for various
reasons, remain marginally attached to the workforce.

Explaining Unemployment
9.3 Learning Objective: Explain what factors determine the unemployment rate.
Review Questions
3.1 The payment of government unemployment insurance likely raises the unemployment rate.
Unemployment insurance payments lower the opportunity cost (the income lost by not working)
of continuing to search for a job, which leads the unemployed to spend more time searching for a
job. The payment of government unemployment insurance lessens the severity of recessions by
helping the unemployed maintain their income and spending.
3.2 The federal minimum-wage law and efficiency wages push the wage above the market wage,
causing some unemployment. In unionized industries, the wage is usually above what otherwise
would be the market wage, resulting in employers hiring fewer workers. Most economists do not
believe that the existence of unions increases the overall unemployment rate, though, because in
the United States only about 6.5 percent of workers outside the government sector are unionized.
3.3 A significant reason that the unemployment rate in the United States has been lower than the
unemployment rates in Canada and countries in Western Europe is the more generous
unemployment compensation payments and social insurance programs in Canada and Western
Europe, which lower the opportunity cost of continuing to search for a job.

3.4 a. Transitioning people from one job to another entails workers finding jobs that match their
skills or workers retraining to acquire the skills necessary for a new job. Workers with the
necessary skills will be frictionally unemployment, while the workers that have to retrain will
be structurally unemployed.
b. To cushion displaced workers, governments use policies such as unemployment insurance
payments, social insurance programs, and aid for worker retraining. Making the policies more
generous aids workers in finding new jobs and in retraining for new jobs, buts lowers the
opportunity cost of finding or retraining for a job, thereby increasing the duration of
unemployment and the unemployment rate.
3.5 Unemployment rises during a recession, so unemployment claims and unemployment insurance
payments should go up. If unemployment insurance payments fail to rise during a recession, the
unemployed workers would suffer large drops in income and the economy would suffer the
results of the drop in consumption spending by the unemployed workers.
3.6 a. and c. are likely to increase the unemployment rate. Lengthening the time workers are eligible
to receive unemployment insurance lowers the opportunity cost of a job search. An increase in
union membership pushes more wages above market wages, thereby increasing unemployment, at
least temporarily until these workers can find jobs in the non-union sector of the economy.
b. and d. are likely to reduce the unemployment rate. Abolishing the minimum wage lowers the
wage from above the market wage for some workers, thereby increasing the number of workers
firms will employ. Making information on job openings more available shortens the search
involved in frictional unemployment
3.7 Henry Ford was paying an efficiency wage, which can cut a firm’s cost by increasing the
productivity of workers. Paying an efficiency wage results in an increase in the quality of workers
willing to work for the firm, and a decrease in the turnover of workers.

3.8 Walmart started paying an efficiency wage to attract higher quality workers and to increase
worker productivity. The higher wages would not decrease Walmart’s profits if the quality of
workers and worker productivity increased sufficiently.
Measuring Inflation
9.4 Learning Objective: Define the price level and the inflation rate and understand how
they are computed.
Review Questions
4.1 The GDP deflator is the broadest measure of the price level because it includes the prices of all
final goods and services included in GDP. The Consumer Price Index measures the prices of
goods and services purchased by a typical urban family of four. The Producer Price Index
measures the prices of goods and services at all stages of the production process.
4.2 The government uses the Consumer Price Index to measure changes in the cost of living because
the CPI tracks changes in the prices paid by a typical urban family of four.
4.3 The potential biases include substitution bias, increase in quality bias, new product bias, and
outlet bias. To have no substitution bias the demand curves for the products in the market basket
would need to be vertical (perfectly inelastic). With a vertical demand curve, an increase in the
price of a product would not decrease the quantity demanded; therefore, there would be no
substitution away from the product when its relative price rises. The Bureau of Labor Statistics
updates the market basket every two years to reduce substitution bias and new product bias, uses
statistical methods to reduce quality bias, and conducts point-of-purchase surveys to track where
consumers actually make their purchases to reduce outlet bias.

4.4 The statement misinterprets how economists use the CPI to calculate the inflation rate. With a
CPI for 2016 of 240, the price level, as measured by the CPI, has increased 140 percent since the
base year, but the inflation rate in 2016 is the percentage change in the CPI since 2015, not since
the base year.
4.5 There is no contradiction because the inflation rate measures the percentage change in the price
level. The inflation rate says nothing about the level of prices. Prices of goods and services may
seem expensive even though those prices are increasing at a slow rate. As long as the inflation
rate is positive, the CPI will increase and each year its value will be “the highest it’s ever been.”
4.6
Base Year (2010) 2017 2018

Product Quantity Price Expenditures Price Expenditures Price Expenditures
Haircuts 2 $10.00 $ 20.00 $13.00 $ 26.00 $16.20 $ 32.40
Hamburgers 10 2.00 20.00 2.45 24.50 2.40 24.00
Movies 6 20.00 120.00 13.00 78.00 12.00 72.00
Total 160.00 128.50 128.40
The CPI for 2017 = [($128.50/$160) × 100] = 80.31; CPI for 2018 = [($128.40/$160) × 100] =
80.25. So, the inflation rate for 2018 = [(80.25 – 80.31)/80.31) × 100] = -0.07%.

4.7 Each price in the consumer price index is given a weight equal to the fraction of a typical family’s
budget spent on that good or service. Ice cream would be more important than bacon in
calculating inflation if households spent a higher fraction of their budgets on ice cream than on
bacon. The Wall Street Journal article referenced in the problem reported that in 2017 the average
dollar amount spent by U.S. households per year for ice cream was $54.04 and for bacon the
average amount spent was $39.07.
4.8
City February 2016 February 2017 Percent Change
New York 181.4 187.3 3.25%
Miami 208.6 222.6 6.71%
Phoenix 158.7 167.0 5.23%
Dallas 160.2 172.1 7.43%
San Francisco 224.2 238.3 6.29%
a. The percent change is calculated as [(February 2017 index value – February 2016 index
value)/February 2016 index value] × 100. As is shown in the table, housing prices in all five
markets rose from February 2016 to February 2017. The largest increase in prices occurred in
Dallas (7.43 percent). The smallest increase in prices occurred in New York (3.25 percent).
b. Since the base month January 2000, housing prices increased the fastest in San Francisco
with a home price index of 238.3 and the slowest in Phoenix with a home price index of
167.0. The home price index measures how much housing prices in the city have changed
since the base month.
c. We cannot determine on the basis of these numbers which city had the most expensive homes
because the numbers are not dollar amounts but indexes that measure prices in each city in a
given month relative to what they were in that city in the base month.
4.9 a. During the period from point B to C when the CPI did not change, the country experienced
zero inflation.
b. During the period from point C to D when the CPI decreased, the country experienced
deflation.
c. During the period from point A to B when the CPI increased at a decreasing rate, the country
experienced a slowdown in inflation (disinflation).
d. During the period from point 0 to A when the CPI increased at an increasing rate, the country
experienced an increasing inflation rate.
4.10 Until the BLS updates the market basket of goods used to compute the CPI to include the new
iPhone models, the introduction of the new models will have no effect on the CPI. Once the new
models are included in the CPI market basket, they will most likely contribute to the increase in
quality bias that causes changes in the CPI to overstate the true inflation rate. Increases in the prices
of these new models partly reflect their improved quality and partly are pure inflation. The BLS
attempts to make adjustments so that only the pure inflation part of price increases is included in the
CPI, but these adjustments are difficult to make, so the recorded price increases overstate the pure
inflation in some products.

9.5 Using Price Indexes to Adjust for the Effects of Inflation

Learning Objective: Use price indexes to adjust for the effects of inflation.
Review Questions
5.1 A nominal variable is a variable measured in current dollars, which means that it is measured
using the actual prices from that time period. A real variable is a variable measured in constant
dollars, which means that it is measured using prices from a base year. That is, a real variable is
adjusted for the effects of inflation.
5.2 As prices of goods and services decrease during a period of deflation nominal earnings are likely
to rise slowly, and may even fall. Real earnings will not fall as much as nominal earnings, and
will rise if the decline in prices is greater than the decline in nominal earnings. Therefore, real
average hourly earnings are likely to increase faster than nominal average hourly earnings during
a period of deflation.

5.3
Nominal GDP GDP Price Deflator Real GDP
Year (billions of dollars) (2009 = 100) (billions of 2009 dollars)
1929 $104.6 9.9 $1,056.6
1933 57.2 7.4 773.0
Real GDP for 1929 = (Nominal GDP/GDP price deflator) × 100 = ($104.6 billion /9.9) × 100 =
$1,056.6 billion. Real GDP for 1933 = ($57.2 billion/7.4) × 100 = $773.0 billion. The percentage
decline in real GDP between 1929 and 1933 = [($773.0 billion – $1,056.5 billion)/ $1,056.6
billion] × 100 = –26.8%.
5.4 We can convert Fitzgerald’s 1924 nominal income of $36,000 to an equivalent income in 2016 by
multiplying the 1924 nominal income by the ratio of the CPI for 2016 to the CPI for 1924:
$36,000 × (240/17) = $508,235. So, you would have needed an income of $508,235 in 2016 to
have the same purchasing power that Fitzgerald’s $36,000 had in 1924.
5.5 In the United States, the real minimum wage in 1957 was $3.70: [($1.00/27) × 100], and in 2016
it was $3.02: [($7.25/240)  100]. In France, the real minimum wage in 1957 was €2.38:
[(€0.19/8) × 100], and in 2016 it was €9.21: [(€9.76/106) × 100].
Between 1957 and 2016, there was a 18.4 percent decrease in the real minimum wage in the
United States: [($3.02 – $3.70)/$3.70] × 100. And, there was a 287.7 percent increase in the real
minimum wage in France: [(€9.21 – €2.38)/€2.38] × 100.
It does not matter whether we have information about the base year as long as we have the CPI
data. Whatever the base year is, we would get the same percentage increase in prices. The
percentage increase in the price level was less in the United States—[(240 – 27)/27 × 100] =
788.9 percent—than in France—[(106 – 8)/8 × 100] = 1,225.0 percent.
5.6 If three cups of coffee and a doughnut can be purchased in 2016 for $10 and for $2,000 in 2056,
the CPI would have to be 200 times greater in 2056 than in 2016 because 200 × $10 = $2,000.
Therefore, the CPI in 2056 would be 240 × 200 = 48,000.

5.7 The real receipts in 2017 dollars for each film are listed in the last column below. The first
column shows the rankings of the top ten films based on their earnings in 2017 dollars. Real
receipts in 2017 dollars equal the nominal receipts reported in the third column multiplied by the
CPI in 2017 divided by the CPI in the year that the movie was released.
Total Box Office Real Receipts

Rank Film Receipts Year Released CPI (2017 dollars)
1 Gone with the Wind $198,676,459 1939 14 $3,476,838,033
Snow White and the
2 Seven Dwarfs 184,925,486 1937 14 3,236,196,005
3 Star Wars 460,998,007 1977 61 1,851,549,372
4 The Sound of Music 158,671,368 1965 32 1,214,827,661
5 101 Dalmatians 144,880,014 1961 30 1,183,186,781
6 Jaws 260,000,000 1975 54 1,179,629,630
E.T. the Extra-
7 Terrestrial 435,110,554 1982 97 1,098,990,575
8 Titanic 658,672,302 1997 161 1,002,327,416
Star Wars: The Force
9 Awakens 936,662,225 2015 237 968,279,515
10 Avatar 760,507,625 2009 215 866,624,968
Star Wars: Episode I:
The Phantom Menace 474,544,677 1999 167 696,188,299
Jurassic World 652,270,625 2015 237 674,288,199
Marvel’s The Avengers 623,357,910 2012 230 664,011,687
The Dark Knight 534,858,444 2008 215 609,489,855
Rogue One: A Star
Wars Story 532,177,324 2016 240 543,264,352
Beauty and the Beast 498,225,739 2017 245 498,225,739
Finding Dory 486,295,561 2016 240 496,426,719
5.8 The economy of Venezuela was suffering from hyperinflation and on the verge of collapse. The
hyperinflation would have wiped out the 60 percent increase in the minimum wage leaving the
real minimum wage lower. With the economy near collapse, jobs were hard to find and there was
little food available to purchase.
Nominal Interest Rates versus Real Interest Rates

9.6 Learning Objective: Distinguish between the nominal interest rate and the real interest
rate.
Review Questions
6.1 The nominal interest rate is the stated interest rate on a loan, while the real interest rate is the
nominal interest rate minus the inflation rate.
6.2 Because the nominal interest rate is the real interest rate plus the inflation rate, an increase in
expected inflation raises the nominal interest rate by the increase in the expected rate of inflation,
assuming that the real interest rate remains constant.

6.3 It is impossible to know whether a particular nominal interest rate is “high” or “low” without
knowing the inflation rate. It is the real interest rate that matters to borrowers and lenders, not the
nominal interest rate. A nominal interest rate of 5 percent with an inflation rate of zero results in a
higher real interest rate than a nominal interest rate of 20 percent with an inflation rate of
19 percent.
6.4 If the economy is experiencing deflation, the nominal interest rate will be lower than the real
interest rate. The real interest rate equals the nominal interest rate minus the inflation rate, but
with deflation the inflation rate is negative.

6.5 The reporter does not understand the definition of deflation. Deflation occurs when the price level
declines. Inflation, even if only half the national rate, increases the price level. It is not possible
for the CPI to drop below zero. The reporter should have written that the change in the CPI drops
below zero when there is deflation.
6.6 a. The real interest rate on a loan with a nominal interest rate of 20 percent and a 19 percent
inflation rate is 1 percent. The real interest rate on a loan with a nominal interest rate of 5
percent and a 2 percent inflation rate is 3 percent. Therefore, you should prefer the loan with
the 20 percent nominal rate.
b. JP Morgan Chase would earn a higher profit on a car loan with a 3 percent real interest rate
than it would from a car loan with a 1 percent real interest rate, so it would prefer the 5
percent car loan.
6.7 The inflation rate from April 2016 to April 2017 as measured by the CPI was [(244.2 −
238.9)/238.9] × 100 = 2.22 percent. With the nominal interest rate on the one-year Treasury bill
of 0.54 percent, the real interest rate equaled 0.54 percent – 2.21 percent = −1.68 percent.
Investors were willing to invest in Treasury bills in 2016 with negative real interest rates because
the bills have low risk (investors were certain the U.S. Treasury would pay the bills off when they
matured) and are easy to buy and sell (they have high liquidity).
6.8 If the monthly inflation rate is 4 percent, the annual inflation rate is about 60 percent. To see this,
notice that at a 4 percent inflation rate, the price level is rising 4 percent per month. If the price level
starts at 100, after two months it would have increased to 100 × 1.04 × 1.04 = 108.2; after three
months it would have increased to 100 × 1.04 × 1.04 × 1.04 = 112.5; and after twelve months to 100
× (1.04)12 = 160.1, or by 60.1 percent. So, the real interest rate would be 4% − 60% = –56%.
6.9 We can answer by using the method of calculating the real interest rate explained in the example
of DVDs on page 685 in the textbook: Real interest rate = Nominal interest rate – Inflation rate.
With $1,000 you can purchase 500 bottles of premium water at the beginning of the year. If you
lend $1,000 for one year at an interest rate of 5 percent, you will receive $1,050 at the end of the
year. With the higher price of premium bottled water, at the end of the year you can buy
$1,050/$2.08 = 504.8 bottles of premium water. So, you can purchase [(504.8 − 500)/500] × 100
= 0.96% more bottles. Therefore, the real interest rate you receive on the loan is 0.96 percent.
Notice that this is very close to the real interest rate on the loan calculated by subtracting the 4
percent inflation in premium bottled water prices from the 5 percent nominal interest rate on the
loan.

Does Inflation Impose Costs on the Economy?

9.7 Learning Objective: Discuss the problems that inflation causes.
Review Questions
7.1 We know from the circular flow of expenditures and income that when inflation increases the
nominal value of expenditures, it must also increase nominal incomes. Consequently, inflation
does not reduce the purchasing power of the average consumer.
7.2 Inflation affects the purchasing power of money. People with incomes that rise faster than the rate
of inflation enjoy an increase in purchasing power, while people with incomes that rise more
slowly than the rate of inflation are hurt by a decrease in purchasing power. In general, inflation
hurts people on fixed incomes, such as retired persons who may be receiving a pension of a fixed
number of dollars each year. (As noted in the text, though, Social Security payments received by
retired workers increase every year by an amount equal to the percentage change in the CPI.)
7.3 Unanticipated inflation is the greater problem. Anticipated inflation can be incorporated into
nominal interest rates and nominal wage contracts. Unanticipated inflation causes the actual real
interest rate and actual real wage rate received to differ from the expected real interest rate and
the expected real wage rate.
7.4 Menu costs are the costs to firms of changing prices. The Internet allows firms to change prices at
little cost so that it has reduced the size of menu costs.
7.5 Deflation can cause consumers to reduce their current spending in anticipation of future lower prices,
and unanticipated deflation increases the burden on borrowers by raising the real interest rate above
the expected real interest rate.

7.6 When the inflation rate turns out to be much higher than most people expected, then the real
interest rate is lower than it was expected to be when loans were made. In these circumstances,
you would rather be a borrower.
7.7 a. Real income is nominal income adjusted for increases in the price level. With inflation, the
real income for James will decrease because he receives a fixed income. However, the
interest income for Frank will likely increase with inflation. Therefore, it is likely that Frank
will have a higher real income 10 years from now.
b. If James’s pension increases each year by the same percentage as the inflation rate, then it is
likely that 10 years from now he will have a higher real income than Frank, whose interest
income is originally $200 less per month than James’s pension income.

7.8 The real interest rate is the cost to Apple of borrowing funds from investors. A low real interest
rate is good for Apple and bad for investors, much like a low price is usually good for consumers,
but bad for producers. Inflation was expected to be 2 percent, but turned out to be 6 percent,
causing the expected and actual real interest rates to differ. The expected real interest rate equals
the nominal interest rate minus the expected inflation rate. The actual real interest rate equals the
nominal interest rate minus the actual inflation rate. In this case, the expected real interest rate is
4 percent but the actual real interest rate equals 0 percent (6 percent nominal interest rate minus
the 6 percent actual inflation rate). Because the actual real interest rate is less than the expected
real interest rate, Apple pays less than it thought it would to borrow, and it gains. Because the
investors are receiving a smaller payment than expected in return for lending funds to Apple, the
investors lose.
7.9 Consumers would defer purchases if they expected deflation to continue so that they would pay
even lower prices in the future. Consumers would buy more if they believed that inflation would
follow a period of falling prices.
7.10 To the extent that the deflation was unanticipated, the actual real interest rate exceeded the
expected real interest rate. The unanticipated deflation increased the real interest rate the farmers
had expected to pay on their loans, thereby increasing the burden of these debts.
Real-Time Data Exercises

D9.1 a. The CPI for June 2016 was 239.842 and for June 2017 was 243.790.
b. The inflation rate as measured by the CPI from June 2016 to June 2017 equaled: [(243.79 –
239.842)/239.842] × 100 = 1.65 percent.
D9.2 a. and b. Data used in the graph in c. below covers the period from June 2011 to June 2017.
c.
d. The inflation rate of 2.80 percent in February 2017 was the highest during these years with
the inflation rate of 2.54 percent in January 2017 and 2.38 percent in March 2017 being the
second and third highest.

D9.3 a. and b. Data used in the graph in c. below covers the period from August 2007 to August 2015.
c.
d. The inflation rate as measured by the CPI was more volatile than the inflation rate as
measured by the CPI less prices of food and energy. In July 2009 the inflation rate measured
by the CPI was −1.96 percent, but measured by the CPI less food and energy prices was 1.53
percent. In February 2017, the inflation measured by the CPI was 2.80 percent, but measured
by the CPI less food and energy prices it was 2.22 percent. In June 2017, the two inflation
rates were similar: 1.65 percent as measured by the CPI and 1.71 percent as measured by the
CPI less food and energy prices.
D9.4 a. The CPI for food and beverages in June 2017 was 249.78, and in June 2012, it
was 233.62. The CPI for apparel in June 2017 was 125.24, and in June 2012, it was 126.25.
The CPI for transportation in June 2017 was 196.42, and in June 2012,
it was 212.23. The CPI for medical care in June 2017 was 474.37, and in June 2012, it was
415.29.
b. The inflation rate over the entire period from June 2012 to June 2017 for food and beverages
was: [(249.78 – 233.62)/233.62] × 100 = 6.92 percent; for apparel, it was: [(125.24 –
126.25)/126.25] × 100 = -0.8 percent; for transportation, it was: [(196.42 – 212.23)/212.23] ×
100 = −7.45 percent; for medical care, it was: [(474.37 – 415.29/415.29] × 100 = 14.23
percent. These inflation rates are the percentage changes over the entire five-year period, not
annual inflation rates.
c. Transportation experienced the lowest inflation rate (−7.45 percent), and medical care
experienced the highest inflation rate (14.23 percent).
D9.5 a. In June 2017, the number of unemployed equaled 6,977 thousand, the civilian labor force
equaled 160,145 thousand, and workers with part-time employment for economic reasons,
slack work, or business conditions equaled 3,286 thousand. These data are reported monthly
and measured in thousands of persons.
b. The civilian unemployment rate equaled [(6,977 thousand/160,145 thousand) × 100] = 4.4
percent. The civilian unemployment rate including persons who are underemployed equaled:
[(6,977 thousand + 3,286 thousand)/160,145 thousand] × 100 = 6.4 percent.

D9.6 a. In June 2017, the number of unemployed men equaled 3,702 thousand, the number of
unemployed women equaled 3,274 thousand, the civilian labor force for men equaled 84,992
thousand, and the civilian labor force for women equaled 75,153 thousand. These data are
reported monthly and are measured in thousands of persons.
b. The unemployment rate for men equaled: [(3,702 thousand/84,992 thousand) × 100] = 4.4
percent, and the unemployment rate for women equaled: [(3,274 thousand/75,153 thousand)
× 100] = 4.4 percent.
D9.7 a. In June 2017, the number of unemployed equaled 6,977 thousand, civilian employment
equaled 153,168 thousand, and those not in the labor force equaled 94,813 thousand.
b. The working-age population equals the labor force plus those not in the labor force. In June
2017, the labor force equaled: 6,977 thousand + 153,168 thousand = 160,145 thousand, and
the working-age population equaled: 160,145 thousand + 94,813 thousand = 254,958
thousand. The employment-population ratio equals civilian employment divided by the
working-age population, which for June 2017 equaled: [(153,168 thousand/254,958
thousand) × 100] = 62.8 percent.
c. If the economy entered a recession, one would expect the employment-population ratio to
decline as fewer people would have jobs.
D9.8 a. The civilian unemployment rate equaled 4.4 percent in the second quarter of 2017, and it
equaled 5.4 percent in the second quarter of 2015. The natural rate of unemployment equaled
4.74 percent in the second quarter of June 2017 and 4.79 percent in the second quarter of
2015. Note that the natural rate of unemployment is calculated on a quarterly, not monthly,
basis.
b. The cyclical unemployment rate equals the unemployment rate minus the natural rate of
unemployment. The cyclical unemployment rate equaled (4.4 percent − 4.74 percent) = −0.34
percent in second quarter of 2017 and equaled (5.4 percent − 4.79 percent) = 0.61 percent in
the second quarter of 2015.
c. The economy improved over the two year period and by the second quarter of 2017 the
unemployment rate was actually below the estimated natural rate of unemployment.
D9.9 a. In June 2017, the number of unemployed equaled 6,977 thousand, civilian employment
equaled 153,168 thousand, employment level—part-time for economic reasons equaled 5,326
thousand, and not in the labor force, searched for work and available equaled 1,582 thousand.
b. The official unemployment rate equals the number of unemployed divided by the labor force,
which equals the unemployed plus the employed. For June 2017, the official unemployment
rate equaled: [(6,977 thousand/(6,977 thousand + 153,168 thousand) × 100] = 4.4 percent.
c. This broader measure of the unemployment rate would include as unemployed the three
categories of unemployed: unemployed; employed but part-time for economic reasons; and
not in the labor force, searched for work and available. In June 2017, this broader measure of
the unemployment rate equaled: [(6,977 thousand + 5,326 thousand + 1,582 thousand)/(6,977
thousand + 5,326 thousand + 1,582 thousand + 153,168 thousand)] × 100 = 8.3 percent.
d. One would expect the gap between the official rate of unemployment and the broader rate of
unemployment to widen during recessions and narrow during expansions. One would expect
the number of part-time workers for economic reasons and discouraged workers to rise during
a recession and fall during an expansion.

D9.10 a. In June 2017, the 3-month Treasury bill interest rate equaled 0.98 percent and the University
of Michigan inflation expectation equaled 2.6 percent.
b. The expected real interest rate equals the nominal interest rate minus the expected inflation
rate. In June 2017, the expected real interest rate for the three-month Treasury bill equaled
0.98 percent − 2.6 percent = −1.62 percent.
c. If the actual inflation rate is greater than the expected inflation rate, borrowers gain and
lenders lose from the actual real interest (nominal interest rate minus the actual inflation rate)
being below the expected real interest rate.
D9.11 a. In June 2017 the CPI equaled 244.955 and average hourly earnings of private production and
nonsupervisory employees equaled $22.03, and in June 2016 the CPI equaled 241.018 and
average hourly earnings equaled $21.53.
b. The average hourly real wage in June 2017 equaled [($22.03/244.955) × 100] = $8.99, and in
June 2016 equaled [($21.53/241.018) × 100] = $8.93. With the CPI having a base period of
1982–1984, the real wage is measured in 1982–84 dollars.
c. The percentage change in the average hourly nominal wage equaled: [(22.03 – 21.53)/21.53]
× 100 = 2.32 percent, and the percentage change in the average hourly real wage equaled:
[(8.99 – 8.93)/8.93] × 100 = 0.68 percent.
d. Given that the average hourly real wage increased 0.68 percent from June 2016 to June 2017,
the average worker was better off.
Suggestions for Critical Thinking Exercises

CT9.1 The unemployment rate would likely increase as unemployment increased by a large number. If
you check the expansions after the recessions of 1991, 2001, and 2007–2009, you’ll see the
unemployment rate rising for a time.
CT9.2 A key part of the CPI construction is seeing how much a consistent market basket of goods and
services costs at different times. The GDP deflator compares real GDP (constructed with
constant prices) to nominal GDP to compute the GDP deflator.
CT9.3 Clearly the second situation would be preferable as the real interest rate would be lower on your
loan while your real wage increases by the same rate in both situations. Put another way,
inflation does more to help you pay back your loan in the second situation. Many students have
difficulty in seeing the use of the real interest rate in this question.

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over.” He smiled into his companion’s eyes.
“When I think, sometimes, of what men’ll do for money, though,”
continued he, “I ’most feel ’s if I didn’t want any of it.”
“But it seems cleaner money, somehow,” Helen interrupted, “it’s
different when a man digs it out of the earth. He doesn’t rob, or
defraud anybody, then; and think of all it can do!”
“Yes.” There was a slow twinkle in Gard’s eyes as he spoke.
“There’s solid satisfaction to me in thinking that one o’ these days, if
I want to, I can get Jinny a solid gold collar.”
They laughed together over this bit of foolishness, feeling,
suddenly, that they were very good friends. It was almost with a little
sense of something unwelcome that Helen, looking across the level
plain, saw a horseman in the distance, coming toward the rancho-
gate.
“Some one is coming,” she said, studying the approaching figure.
“I wonder who it can be; Daddy isn’t expecting anyone.”
Gard turned his head and they watched together.
“It isn’t one of the men,” commented Helen. “He looks cityfied,
doesn’t he?”
It was no careless cowboy figure that they watched. Whoever it was
rode compactly, elbows down, and the horse was not running, but
coming at an easy ’lope.
“Why!” the girl exclaimed, after a moment or two, “I believe it’s
Mr. Westcott!”
The name set Gard’s heart pounding, but he kept his quiet pose in
the steamer-chair, and only the faintest flutter of distended nostrils
betrayed the emotion that was surging within him.
He had no real fear that Westcott might recognize him. The
lawyer, as it happened, had seen him but twice; once at Phoenix, just
after his arrest, and again on the occasion of that memorable visit to
Blue Gulch. Nevertheless, Gard was thankful that he was warned of
the new-comer’s approach.
“Do you know him?” Helen asked, still watching the rider, and
Gard answered, promptly enough, that he had heard of him.
“He’s stopping at the corrals,” said Helen, presently. “I hope
there’s some one there to take his horse.”
She started off, with a backward glance and a smile for her invalid,
and presently Gard saw her going toward the corrals, followed by
Wing Chang. She walked with a light, springing step that seemed to
him must be peculiar to her alone. He had seen girls, back in Iowa,
but they had not walked like that.
“There ain’t anybody like her,” he said, half aloud, replying to his
own thought. Then he remembered that happy glance, and smile,
and a shiver of pain ran through him.
“Heaven help me,” he muttered, “She wouldn’t have looked like
that if she’d known.”
Helen, in the meantime, was greeting Westcott, who walked up to
the casa with her, leaving his horse for Chang to unsaddle and turn
in. He had come up to Sylvania to see a man, he explained, and when
he got where the man was, why the man was not there. He showed
his handsome, even teeth in a merry smile at his own jest, and
somehow managed to convey to Helen the idea that the man “wasn’t
there” for the reason that he was afraid to meet him, Ashley
Westcott.
“It’s just a game of bluff some smart Aleck is trying to play on me,”
he added, with pleasant carelessness; “It isn’t of much importance,
except as it gives me the excuse I’m always glad of, to ride out here. I
shall have to wait over, a day or two, to give the fellow a chance to
make good, I dare say.”
His eyes narrowed when he was introduced to Gard. Kate Hallard
had written to him, three days before, and the letter had brought him
to Sylvania in a hurry. He had seen Mrs. Hallard and, therefore,
Gard’s name had significance for him.
He seated himself in the chair from which Jacinta had long since
removed the tray, and made a casual inquiry about Gard’s hurt. Gard
explained it briefly, giving, to Helen’s immense relief, none of the
details.
“I was in Sylvania this morning,” Westcott remarked, taking the
glass of ice and the bottle of ginger ale that Jacinta brought him.
“Came up from Tucson, and got that brute of a stage at Bonesta.”
“It is a horrid ride,” Helen commented.
Gard said nothing, and Westcott and Helen chatted indifferently
for a few moments of matters common enough, the news and talk of
the territory, yet as new to Gard, in large measure, as though he had
been a foreigner. The lawyer turned to him again, irritated by his
silent scrutiny.
“I saw your friend Mrs. Hallard in Sylvania,” he said, “She was a
good deal worried to know what had become of you.”
Gard’s eyes flashed, but his reply was given in a low, even tone.
“That was mighty kind of her,” he said, “I calculated to be on hand
—we reckoned you’d be coming soon. When you go back you can ease
her mind, and let her know I’m all right.”
Helen looked puzzled. She was not familiar with Sylvania,
although it was the post office town of the rancho, but she knew, in a
vague way, who Mrs. Hallard was. It would have been difficult not to
know, when there were but half a dozen white women within a radius
of fifty miles. She could not think of her, however, as a friend of this
new acquaintance. She had seen Mrs. Hallard once, and Westcott’s
apparently chance remark had exactly the effect he had calculated. It
troubled her, and disturbed the atmosphere of friendliness which he
had dimly felt between the girl and Gard, when he saw them
together.
“It seems curious to find Mr. Gard here,” the lawyer went on,
addressing Helen. “He is just the man I came to Sylvania to see. You
can bank on it I did not expect to meet him when I rode this way.”
He overshot his mark, that time, going too far in his anxiety to
produce an impression unfavorable to Gard. Helen’s hospitality was
touched, and her sympathy enlisted for her guest. Whatever his
friendship for Mrs. Hallard, of whom she really knew nothing
definite, she did not believe that the man who sat there regarding
them both with serene eyes, would ever be afraid to meet Ashley
Westcott.
She looked from one to the other, and Gard smiled as he answered
the lawyer’s remark, speaking to her rather than to the other.
“Yes,” he said, “I’m the man. I told Mrs. Hallard,” he added,
glancing at Westcott, “to tell you to see me.”
“I shall, all right,” the lawyer replied, pointedly, and turned to ask
Helen some question about her father. She was glad of the diversion,
and went into detail about his errand to the upper range.
“We’re going to have an orchard,” she explained, “Father had some
trees put in three or four years ago; I believe he must have sat and
held their heads all the while I was away, and watered them with a
teaspoon.”
The others joined in her laugh at the vision conjured up of Morgan
Anderson playing nurse to desert trees.
“They are only a few grape-fruit, and a date palm or two,” Helen
went on, “but they have kindled his ambition, and now he is planning
for oranges, and apricots.”
“Has he got the trees yet?” Gard asked.
“Mercy, no! Our needs are still more elemental than that. He has
gone after some cattle to ‘gentle’ for plowing. Can’t you just see those
wild-eyed long-horns figuring in pastoral idyls on the plain?”
Westcott grinned, but before either man could comment Wing
Chang appeared from the direction of the adobe structure that served
him for kitchen, and beckoned Helen to a domestic conference.
“Wing Chang’s official beck is equal to a royal summons,” she said,
lightly, “so I shall have to be excused for a season.”
When she had departed the two men regarded each other for a
little space. Westcott took out paper and tobacco, offering them to
Gard. The latter declined them and the lawyer began rolling himself
a cigarette.
“I take it you’re an attorney, Mr. Gard?” he began, in a tone of
careless query, as he struck a match.
At Gard’s negative he held the little taper alight in his finger for an
instant, while he stared in surprise.
“Oh,” he said, recovering himself quickly, and lighting his
cigarette, “I thought you must be. I rather figured,”—with a laugh
which he meant to be irritating, “that you were a young attorney, or a
new-comer in the territory, and trying to scare up business.” He
puffed a cloud of smoke into the air and regarded his companion
through it, with veiled eyes. “’Twas rather natural, don’t you think?”
he persisted, with a sneer, “considering the nature of the little game
up at Sylvania?”
Still Gard did not speak. He had put his well foot to the ground,
and curled the other leg up that he might lean forward, and he sat
regarding Westcott with quiet attention.
“I suppose you know, anyway,” the latter finally said, with a very
good assumption of contempt, “Anybody with a headpiece might,
whether he’s a lawyer or not, that neither my client nor I need feel
obliged to pay any attention to the matter.”
Gard seemed to turn the remark over in his mind.
“Then what made you come up here?” he finally asked.
“That’s easy,” Westcott answered, scornfully. “I wanted to see who
was trying to make a fool of poor Kate Hallard. I don’t wish her any
harm, and I wanted to put her wise that she’s being used by some
sharper, in a queer game.”
“I guess you’ll think better o’ that before we get through, Mr.
Westcott,” Gard said, with deliberation.
“Not much I won’t.” Westcott was admiring the rings he had blown
into the air. “Fact is, my friend,” he went on, with an air of easy
confidence, “the more I think of your little scheme the less I think of
it. In the first place, it won’t work. My client is in possession. That’s
nine points, you know. By way of a tenth point, he has a quit claim
from Mrs. Hallard—”
“That’s one item,” Gard interrupted, softly, “that I guess you won’t
care to dwell on, when the matter comes to be pushed.”
“Pushed!” Westcott ignored the first part of the speech. “I tell you,
man,” he cried, “you’ve got nothing that can be pushed! That deed
you an’ Kate Hallard pretend to have found hasn’t a leg to stand on.
You’d better be careful you don’t get into trouble with it.”
“I’m going to, Mr. Westcott,” the slow, calm tone made the lawyer
feel uneasy, he could not have told why.
“If it will save you any trouble, my friend,” he sneered, at the same
time keeping a close watch on the other’s face, “I’ll tell you that I saw
some time ago, in a Chicago paper, that Jared Oliphant is out of
commission—softening of the brain. I suppose you weren’t banking
any on him, though?”
“We’re banking on facts,” was Gard’s reply.
“And Sawyer’s skipped the country.”
“Who’s Sawyer?” Gard’s question came quick and sharp, nailing
Westcott’s blunder fast. The lawyer looked blank for an instant, then
recovered himself.
“Why Kate Hallard seemed to think you were going to get some
help through him,” he lied; “but I know Sawyer. You can’t do it.”
“You must have known him,” Gard said, “if you know he witnessed
that deed; for Kate Hallard never told you.”
Westcott stared out at the desert. He was playing a desperate
game, and he knew it. He would have given much to understand the
inscrutable man who sat opposite him. He did not feel that he did
understand him, fully; nevertheless, he had his own theories of the
stuff men are made of, and presently he leaned forward.
“Look here, Gard,” he said, “This is mighty poor business for a
man like you to be in.”
He spoke rapidly; for Miss Anderson had just appeared at the door
of the adobe kitchen, still talking to Wing Chang.
“I don’t know what you expect to make by it,” Westcott went on;
“but I don’t want Kate Hallard to get into any trouble. She can’t
establish that deed. It’s no more use to her than so much blank
paper. But I’ve got certain things in view. I’m going into politics in
this territory, and there are reasons why I don’t want a thing like this
coming up. You know how things get garbled—” He hesitated, and
then went on, with a glance in the direction of the girl, who was now
approaching.
“Between ourselves,” he said, rapidly, “what’s the reason you and I
can’t do business together?”
He regarded his companion narrowly. Helen had stopped, near the
casa, and was scanning the desert from under her hand.
“What do you say?” Westcott all but whispered. Gard looked at
him a full moment before he spoke:
“I guess we couldn’t do business together,” he said, slowly, “But I
guess we shan’t need to, Mr. Westcott; because you’re going to fix
this matter up right. You’re going to give Mrs. Hallard back the
property you stole from her, or else you’re going to pay her the full
value.”
“Or else?”
There was a battle of eyes between the two men. Westcott’s
flinched, finally, and sought the horizon.
“There ain’t any other ‘or else,’” Gard said, at last. “It’s going the
way I stated.”
Westcott had arisen, sneering, but before he could speak again
Helen’s voice broke in upon them:
“They’re coming!” she cried, joining her guests. “You’d think they
had a whole drove of cattle, from the noise.”
A cloud of white dust far on the desert had resolved itself into a
flurry of men, horses and cattle, coming in on a run. There was a
thunder of hoofs, and a chorus of yells, and presently the “gentle”
work-cattle were being herded into one of the corrals.
One of the horsemen separated himself from the group and rode
on to the casa. This was Morgan Anderson, and he shouted greeting
to Westcott as he swung from the saddle. He came into the shade of
the cottonwoods firing a volley of genial questions, and giving bits of
detail about the morning’s work, until Helen reminded him that it
was close upon dinner-time. That meal was taken at noon, at the
Palo Verde, so Anderson excused himself to clean up. He was dusty
and begrimed from the hot day’s work. He carried Westcott off as
well, to remove the traces of his own long ride, and as Helen had
already gone into the house, on some domestic errand, Gard was left
alone.
The temporary solitude was welcome, and he lay back in the long
chair half dizzied by the thoughts and memories that besieged his
brain. Uppermost, for the instant, was an intense, grateful sense of
relief. Westcott had so plainly not recognized him that he might
consider one source of immediate danger to himself removed. He
would probably be able to carry this business through with no other
difficulties than lay in the matter itself.
There would be plenty of these. Westcott would see to that. He was
evidently fully aware of the position he was in, and would let no
scruples stand in the way of protecting himself.
“He’ll do just about anything—” Gard spoke half aloud, then
checked himself, recalling that this was not the solitude of the glade.
“He’ll make a big fight,” he thought, “both to keep the property and
to escape being punished.”
“Punished!”
The word came home to him with stunning force. The punishment
for this crime, if Kate Hallard saw fit to press the matter, was jail!
And Kate Hallard would probably do what he advised.
Sudden fierce exultation leaped into the man’s heart. Beneath his
quiet he had been deeply stirred by the encounter with Westcott.
“I wonder how he would like being in jail?” he thought, grimly,
and brought himself sternly into line again.
“There ain’t any right of way for me there. I must stop that,” he
whispered, the knuckles of his big hands white as wool under the
strain of clasping his chair-arms.
The next instant he sat upright, staring out across the hot sand,
but seeing only the vision of Helen’s dainty maiden loveliness. The
thought of his heart sent the blood from his face.
“I’ve settled my account with Ashley Westcott,” he muttered, “God
knows I’ve settled my account; but if that is what he’s aiming to do
—”
He shivered, sinking back into his chair. Wing Chang was
approaching with a tray of food.
“If that is what it is,” Gard finished to himself, turning to greet the
Chinaman, “Then I guess Mr. Ashley Westcott and I will have to open
a new account; and he wants to look out.”
CHAPTER V
To Westcott’s secret delight Morgan Anderson, going after dinner to

see that his other guest had been properly served, found Gard fast
asleep in the long chair.
“We’ll let him have his siesta out,” said his host. “I don’t suppose
he got any too much sleep last night, with that foot. Helen, you and I
can take Westcott to see the new corrals.”
This arrangement was entirely to Westcott’s pleasure. He knew,
from past experience, that the cattleman would promptly become
interested in some problem of the range, and leave his entertainment
to Helen.
He strolled by her side as they made their way to the corrals, and
put from his mind the uneasy thoughts that kept intruding. In spite
of his defiance, he was horribly afraid of what Gard and Mrs. Hallard
might be able to do. He did not know how they would move to
establish the deed, but he was in a position that would make
publicity awkward. How he wished he knew where the paper had
been found! To get any help from Oliphant he believed was out of the
question, and he, himself, had been unable to find Sawyer. He was
sure that Gard could not get hold of him; and if he should, he knew
how to fix the fellow. He had one more card up his sleeve, and would
play it, if Sawyer appeared.
But after this! He stole a glance at the girl walking beside him. He
wanted money; he wanted power; he wanted position—to offer her.
He was almost where he just now aspired to be on the political
ladder. He had not tried for small things; he was after the District
Attorneyship, and it was coming his way, now. Another year, and
then, ... by Heaven! Everything was going to be straight! There
should be nothing that those clear gray eyes might not see!
But this matter must not come out! He would see Mrs. Hallard in
the town while Gard was laid up. His career should not be ruined,
just as he was getting where he could hold up his head and choose
the straight path. He was weary in his soul of the other.
Helen looked up with a glance of inquiry.
“They seem to be long, long thoughts,” she said, with a smile.
“They are,” was the quick response. “I was thinking of my
ambitions.”
“If it were so, it were a grievous fault,” she quoted, gaily.
“I don’t think so!” He threw out his chest and looked down at her
from his full height. “A man’s bound to have ambitions of some sort,”
he said, “They’re a measure of himself. Of course I have mine. I want
the things I want when I can get them; but I want them, nevertheless,
and I mean to have them.”
“Such as a gold collar for your donkey?” Helen asked,
enigmatically.
Westcott looked puzzled, but she did not explain.
“Not exactly that,” he finally said, “If my donkey won’t go without a
gold collar I’m sorry for him; because he’s going just the same. He’s
got to carry me, ‘For the good of the order.’ This Territory needs
men, Miss Anderson: and I mean to be one of the men that it needs.”
“Oh! That is good!” Helen’s sympathetic response quickened what
Westcott, if he had characterized it, would have called his good
impulse.
“There’s a lot that needs straightening out within our lines,” he
said, “And I want the chance to help in the work. At any rate, it’s not
an ignoble ambition.”
“Indeed it is not.” Helen had never before seen Westcott in this
mood, and she rather reproached herself that she did not feel a
keener response. She felt that she had not done him justice.
“I am glad you think about those things,” she told him. “Father
talks to me, sometimes, and I know that he is often troubled. It
seems as if every man is solely for himself. We need those who can
see wrong in high places, as well as low; and who have courage to
combat it.”
Westcott felt a pang of wretchedness as he answered her frank
glance. He realized that she would despise him if she knew some of
the things that he had done, and he winced in the realization. But he
meant to leave all that behind. He would do something for Mrs.
Hallard, and once he had won this splendid girl he would walk the
open way. Heavens! What could a man not do, with such a helpmate!
A sudden sense of his own unworthiness brought unwonted
humility into his heart. Ashley Westcott had never before, in his
grown-up life, been so near to feeling a noble impulse.
“Miss Anderson,” he said, “I’m afraid I should never come up to
any ideal of yours; but I aim to do as near right as I know how.”
They were at the corrals now, where the cattleman, who had drawn
ahead, was already talking to Sandy Larch about some young horses
that were to be got ready for shipment east, before spring. Polo
ponies from the Palo Verde enjoyed a good market back in “The
States.”
In one of the corrals the future work-cattle were penned, half a
dozen head, lean, leggy brutes, wild-eyed and ugly. They kept
together, moving restlessly about in a bunch, watching the visitors
sullenly, and occasionally lunging at one another with wide, wicked
horns.
“They’re beauts, for fair,” Sandy Larch remarked, “Only they can’t
seem to make up their minds to look it in public. They’re that kind o’
modest vi’lets.”
“’Twon’t be exactly a Sunday school picnic to break them in,”
Westcott remarked, looking them over.
“Sure it will,” said Sandy, impressively. “Why them cows will be
door-yard pets, once they’re handled. Their bad looks is just a
yearning for appreciation. That one, now—”
He tossed a little clod into the blazed face of one huge steer that
had moved a little apart from the others. It was a vicious-looking
brute, and stood lowing, sullenly.
“That there blaze-faced cow’ll be coaxing fer sugar out’n your hand
in a week’s time, Miss Helen,” Sandy declared. “Can’t you see it in his
eye?”
Helen could not see it, and said so, frankly. A cowboy, minded to
reach the further corral, where the young horses were, sprang down
into the enclosure with the cattle, and started across.
In an instant the big red steer came charging upon him, with
mischief in his eye. The cowboy saw the brute, and dodging, made a
rapid sprint for the nearest fence, clambering over it amid the
derisive shouts of the spectators. The man’s sudden scramble had
brought him within a few feet of Westcott who, turning to look at
him, made a gesture of recognition.
“Hullo, Broome!” he said: “I didn’t know you were down here.”
“Looks like I was on the spot,” the fellow answered, “I bin holdin’ it
down fer about a week.”
“I heard you went prospecting,” Westcott continued, and Broome
swore, under his breath.
“Came mighty near cashin’ in that trip,” he growled, and then he
drew nearer, with a quick glance at the others, who were walking on
toward the horse corral.
“Say, Mr. Westcott,” he muttered, “Have you seen that there feller
up ’t the casa? Him with the hair mattress on his face?”
“Do you mean Gard?” Westcott asked in amazement.
“Yep: that’s his name. Damn him an’ it! I met up with him on my
‘tower.’ He’s some buffalo now; but he was haired up like a bug-
house billy-goat then. But say, Mr. Westcott: he’d struck it rich; got a
streak o’ color that fair stunk o’ gold, back in the mountains. I want
to tell you ’bout it.”
Westcott looked after his companions.
“I can’t stop to hear it now, Broome,” he said. “Shall you be round
when I leave here? I’ll talk to you then.”
“I’m goin’ to be workin’ with the horses all the afternoon,” Broome
answered. “We’re goin’ to be bustin’ ’em out, an’ that’s one o’ my
jobs.”
He added the last with a good deal of pride, and Westcott nodded.
“I’ll see you, then,” he said, moving off.
“Do you know Broome?” Mr. Anderson asked, when Westcott
overtook the others.
“Pretty well”; was the reply. “I knew him up north. He was cow-
punch for a friend of mine, and I used to be up there a good deal.
He’s a good hand with horses.”
“So he claims,” Anderson said. “He blew in the other day, bragging
that he’s a first-class bronco-buster. We’re pretty short, so Sandy
took him on. I don’t think much of his looks.”
“Oh, he’s all right.” Westcott spoke carelessly. “A good many
singed cats look worse.”
Sandy Larch had gone up to the cook’s quarters on an errand, and
passing the casa found Gard awake.
“Hullo, Mr. Larch,” the latter called, espying him.
“Mister Larch?” Sandy made a pretense of looking for the person
addressed. “Where ’d you keep ’im?” he asked, with elaborate
solicitude.
“Keep who?”
“Mister Larch.”
“They ain’t no such party hereabouts,” he went on before Gard
could reply. “Leastwise you don’t know ’im. Dudes, an’ Chinks, they
nominates me Mister Larch; because the first don’t know no better,
an’ the others they has to, er git busted good an’ plenty. But to my
friends I’m Sandy.”
“I believe it!” laughed Gard. “I guess your friends find you all sand,
when they need the article.”
Sandy looked at him with frank admiration.
“Say: now you’re shouting,” he cried. “I like that there. Speakin’ o’
bouquets, you couldn’t ’a’ handed me a prettier one if you’d set still
to think it up fer a week.”
“Glad you like it,” replied Gard. “I meant it to be liked.”
“Like it? Say! you just combed my hair nice, didn’t you? An’ when
you need someone to weigh out sand you just buscar me, Mr. Gard.”
“No you don’t; you drop that!” Gard looked stern.
“Drop what?” demanded Sandy, startled.
“Your Mister Gard. That rule of yours has got to work both ways,
and my name is Gabriel.”
There was a twinkle in the brown eyes; but Gard’s tone was
inflexible.
“Gabriel!” gasped Sandy. “Lord! How do you git off at it? Gabriel”;
he repeated, “Shoot me if I can git a rope over that.”
“Glory be!” A gleam of fun crossed his anxious face. “That name’s
too long for every day,” he said, “But I can fix it: I’ll call you Angel, if
you like. Angel Gabriel. That’s great! That’s how we’ll fix it. Angel on
week-days; Gabriel on Sundays, an’ Angel Gabriel on Fourth o’ Julys,
an’ when I’m drunk. Angel Gabriel’s a first rate name fer a amachoor
sin-buster to sport.”
“You’ll drop that, too.” Gard seized one of the cushions Helen had
supplied his chair with, and hurled it at the cow-puncher. “Don’t you
go making fun of my name when I’m down,” he cried. “Sandy, you’ve
got to call me Gard.”
He held out his hand and Sandy grasped it, cordially.
“I like you, Gard,” said he, with quick seriousness. “We’re partners
for fair if you say so. If you need friends, as I expressed a while back,
you’ll know where to look fer one of ’em; you won’t fergit it?”
“Never,” Gard said, heartily, and Sandy drew back. The others
were coming up from the corrals.
“I never was hard on any man unless I thought he needed it,
Gard,” remarked Sandy, looking toward them. “But that there
Westcott—well I’ll be damned if I kin ‘go’ him. He can rope ’n hogtie
the law, ’n brand it ten different ways while you’re lookin’ one; but I
bet he ain’t always goin’ to git away on time.
“Say, Gard: he’s mighty sleek to look at, an’ women like sech; but if
I thought he was likely to git a rope over our pretty filly there—
damned if I wouldn’t wanter let a little daylight through ’im.”
So Sandy, too, had his fears. Gard’s eyes narrowed as he surveyed
the approaching group.
“Shucks, Sandy!” he exclaimed. “You want to keep away from the
loco patches, man. He couldn’t do it!”
The thought of Helen’s frank, pure eyes put unnecessary emphasis
into his speech; but Sandy was pleased.
“Good talk!” he cried, with a long breath of relief. “Guess I’m some
of an old fool; but I’ve seen the little gal grow up from that high,”
measuring an incredibly short distance above the desert, “An’ you
put in a pin where I tell you, Gard: that there Westcott’s a tarantula
an’ a side-winder all into one; an’ some day you’ll know it.”
“I guess that’s no lie, Sandy.” Gard’s face was pale, and his eyes
wore a strange look. He spoke very low; for the others were coming
within earshot.
“Guess I’ll mosey along,” the foreman said. “I come a driftin’ up
here after some hog-grease, an’ I’ll have to buscar Chang fer’t.”
He walked off in the direction of the kitchen as the others began
talking to Gard. Half an hour afterwards Anderson was waving adios
to Westcott, from the great rancho gateway.
The attorney rode out on the desert, glorious in the afternoon
light, and taking a wide sweep turned back by way of the corrals. A
cow-puncher who had been squatting against one of the fences,
waiting, got up as he came in sight, and shuffled out to meet him.
“What did you want of me, Broome?” Westcott asked at once.
Broome lounged up against the fence, his hands in his pockets.
“I been playin’ in a hell o’ luck lately, Mr. Westcott,” he said.
Westcott made a move as if to ride on.
“If it’s nothing but a hard luck story,” he began.
“No, no. It ain’t.” Broome laid a restraining hand on the pony’s
mane.
“I want ter know who that feller is up yonder.” He jerked his head
toward the casa, at the same time characterizing Gard after a manner
entirely to his own mind.
“I don’t know him from a hole in the post,” Westcott said, with
great apparent candor. “What makes him get on your nerves so?”
“He give me the double cross an’ the grand throw-down, sure, all
in the same shuffle,” Broome said, with a snarl.
“Where was that.”
“Sommers in the mountains. I was lost in the desert; pretty near
cashed in, an’ I met up with this feller. He took me inter camp, hell of
a outfit. Everything made outer nothing, same ’s a Papago where they
ain’t no settlement handy. He was eatin’ tree beans, an’ shootin’
game with a bowarrer, an’ he had all sorts o’ scare-crow Bible verses
wrote up round like a Sunday school. Sufferin’ snakes! You never see
the beat of it!”
“I don’t know as I ever want to,” Westcott said, impatiently. “Drive
on, Broome.”
“I’m a drivin’. Gimme time. Say, Mr. Westcott: the cuss ’d struck it
rich up there, like I told you. Got a vein o’ yeller laid open like a
roarin’ buttercup.”
“Got it staked and located, too, I suppose,” the lawyer said, with a
sneer. “Bite it off, Broome: what are you driving at?”
“I tell you I am bitin’ it off,” was the sullen rejoinder. “I tell you
there’s gold to burn up there. It’s the damndest, likeliest place you
ever see.”
“Why didn’t you prospect a little too?”
“Prospect!” Broome swore, savagely.
“That there locoed buffalo he tried to kill me, when he found I’d
discovered the vein. He’d took me up the trail clean dopy, an’ he
brought me down blindfold, with my hands tied, on the back of a
damned little she-ass; so I wouldn’t know how to git back there.”
“Oh,” Westcott jeered. “And what you want of me is to take you by
the little hand and lead you back there and let you dig?”
“No I don’t neither! I got a good scheme, an’ I want ter let you in
on it. You done a lot fer me, once, Mr. Westcott.”
“You bet I did,” was Westcott’s response. “You owe me the price of
your own neck, whatever that may be worth to you; but I can’t see
where you’re going to pay it out of this scheme.”
“I’d a done it all right by now if that feller hadn’t nearly killed me,”
Broome said.
“Why didn’t he quite kill you if he wanted to?” asked Westcott,
incredulously.
“Hell! I dunno,” was the frank admission; “I’d a done him good an’
plenty, you bet; but he didn’t, an’ here I am.”
Westcott sat his horse, waiting, with an elaborate assumption of
patience.
“Here’s what I’m thinkin’ of,” began Broome, talking fast. “I’m
busted, Mr. Westcott: I ain’t got even a bronc o’ my own; but if I c’d
git anybody to grub-stake me, I’d go up the railroad to where Gard
left that burro—I know the place all right—an’ I’d git ’er; I’d know ’er
by a big scar on one shoulder. An’ you bet the hash once she was out
on the desert she’d strike fer that there camp in the mountains. She’s
that kind. He tamed her out o’ the wild, he said, an’ she never
knowed no other place.”
“Then what would you do?”
“Be Johnnie on the spot,” replied Broome. “Git in an’ dig. In the
same place, mebby.”
“Do you mean jump it?” The question was put in a low tone.
“I ain’t sayin’ what I mean; but I mean all ’t ’s necessary to git back
the rights that feller done me out of.”
Westcott considered, looking thoughtfully out on the desert.
“It’s risky,” was his comment, at length.
“I ain’t askin’ you to risk it,” growled the other. “All I want o’ you ’s
a grub-stake, an’ I’ll divvy fair.”
“I should advise you to.” The quiet voice was full of meaning.
“I will, fer fair. Will you do it?”
“I’ll think about it”; Westcott spoke in an ordinary tone. “There
may be a fair prospecting chance in it,” he continued. “I’ll see you
again. I wouldn’t do any talking if I were you,” he added.
Broome regarded him with sullen scorn.
“Think I’m a damned tenderfoot to go shootin’ off my mouth?” he
demanded.
The lawyer made no reply as he rode away, while Broome went
back into the shade. Wing Chang, darting around a corner of the
fodder-sheds, to make sure which way he turned, came face to face
with Sandy Larch, walking in the direction of the horse-corrals, his
surprised eyes following Westcott’s vanishing figure.
“Mistlee Westclott,” said Chang, noting the foreman’s interest.
“Him an’ Bloome have long talkee-talkee out there, allee samee heap
chin-chin.”
“So do you, you heap heathen,” replied the foreman. “What you
doin’ down here?”
The Chinaman grinned, full of friendliness.
“Sam Lee kid say you come look see for hog lard when me gone.
When come back I bling him.”
He held out a broken bean-pot containing the desired article.
Sandy Larch took it, sniffing it critically.
“Good boy, Chang,” he said, in approval. “And you just remember
this that I tell you: Broome an’ Mr. Westcott, they’ve most likely bin
arrangin’ a series o’ Salvation Army joss meetings, fer to convert all
you Chinks. Sabbee dat?”
“Me sabbee.”
“All right, then; you just sashay back an’ git on your cookin’ job.
That’s all.”
He put a broad hand on the Chinaman’s shoulder and turned him
about.
“Allee lightee,” Wing Chang said, and went his way, smiling,
inscrutably.
CHAPTER VI
“I’m sure you ought to have stayed longer,” Helen Anderson said.
“Such a hurt as you had can’t be well by now.”
Gard, from the saddle, thrust forth his hurt foot and moved it
about.
“It has got well, first rate,” said he, meditatively. “Your father can
sure get his certificate off me, any day.”
He spoke lightly, not glancing at the upturned, troubled face. He
spoke truthfully. His foot was well on the road to recovery, but he
knew, in his heart of hearts, that he was running away from the Palo
Verde, and that his resolution to do so was not very strong.
“It’s the first time you have been on a horse since that day,” Helen
continued. “Wouldn’t you do better to go in the buckboard, after all?”
He knew that hers was but the solicitude of the hostess; but the
kindly interest of her tone was like nectar to him. It drew his eyes to
hers, which suddenly sought his stirrup. Gard pulled himself up with
a jerk.
“I’ll be all right,” said he, with a sudden stiffening of voice and
manner. “I ought to ’ve gone before.”
She drew back, a little coldly.
“It’s too bad you’ve been detained,” she said, and he could not bear
it.
“It ain’t that,” he said, quickly. “I’d like to stay. I don’t know how to
tell you how I’d like to stay. But I’ve got to go. And anyway, I must be
in Sylvania soon ’s possible. There’s a heap of things I’ve got to do. I
—”
He realized that he was getting beyond bounds, and was glad that
Morgan Anderson came up from the corrals just then.
“Here’s your last chance, if you want to change your mind and go
in the buckboard,” the cattleman called.
The buckboard, with a team of broncos driven by one of the men,
was already driving away. Strapped at the back was Gard’s suit-case,
which Anderson had insisted upon having brought out from the hotel
in Sylvania. Gard felt quite sure that he preferred to ride, and
Anderson gave it as his opinion that that was the best way to travel.
“Better ’n railroad trains, or automobiles,” he declared, and
quoted, as a clincher to his opinion, “‘A good man on a good horse is
nobody’s slave.’”
Gard had been at the rancho five days; five wonderful days, they
were to him, and he felt that he dared not stay another hour. The
cattleman had not been able to help him much, on the business that
had been his errand to the Palo Verde. Ashley Westcott had been
diligent in seeking, a couple of years before, to learn what had
become of Sawyer, after he acknowledged the Oliphant deed to Ed
Hallard; but it had never occurred to him to mention the young
notary to Morgan Anderson.
Curiously enough, however, the first person whom Gard had asked
about the notary, after learning of Mrs. Hallard’s trouble, had
referred him to the cattleman. It was this fact that had brought him
out to the Palo Verde.
Anderson remembered the young fellow. Sawyer had “developed
lungs” in Sacramento, and had come down to the desert in search of
health. He had got better, Anderson knew, and had “gone back
inside”—he thought to San Francisco. He gave Gard the address of a
correspondent of his own in that city, who might, he thought, be able
to furnish Sawyer’s address.
“I wish I could have helped you more in what you wanted to
know,” Anderson said, shaking hands with his guest. “But you come
out again while you’re down this way, and maybe we’ll have better
luck all round.”
Gard thanked him, and with another word or two to Helen, rode
away. Anderson stood watching him, long after the horse and rider
had become a mere speck on the yellow desert.
“There’s something awfully likable about that chap, Sis,” he
remarked to the girl at his side. “But he puzzles me, too.”
“Yes?” Helen answered, absently, and her father glanced at her
quickly.
What he saw seemed to reassure him. She was bending over Patsy,
whose paw had come into painful contact with prickly pear.

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Brief Chapter Summary and Learning Objectives

9.2 Types of Unemployment (pages 290–293)

9.3 Explaining Unemployment (pages 293–295)

9.4 Measuring Inflation (pages 295–298)

9.7 Does Inflation Impose Costs on the Economy? (pages 302–306)

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Measuring the Unemployment Rate, the Labor Force Participation Rate,

B. Problems with Measuring the Unemployment Rate

C. Trends in Labor Force Participation

D. Unemployment Rates for Different Groups

E. How Long Are People Typically Unemployed?

F. The Establishment Survey: Another Measure of Employment

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H. Job Creation and Job Destruction over Time

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Types of Unemployment (pages 290–293)

A. Frictional Unemployment and Job Search

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Extra Solved Problem 9.2

Unemployment Reason for Unemployment

Source: U.S. Department of Labor, Bureau of Labor Statistics. www.bls.gov

Solving the Problem

Percentage of The Unemployed

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Explaining Unemployment (pages 293–295)

A. Government Policies and the Unemployment Rate

Extra Solved Problem 9.3

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Solving the Problem

Measuring Inflation (pages 295–298)

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A. The Consumer Price Index

B. Is the CPI Accurate?

C. The Producer Price Index

Extra Solved Problem 9.4

Solving the Problem

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Step 2: Determine the value of the market basket.

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Extra Solved Problem 9.5

Solving the Problem

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Nominal Interest Rates versus Real Interest Rates (pages 301–302)

Extra Solved Problem 9.6

1981 1984 1985 2014 2015 2016

Solving the Problem

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Does Inflation Impose Costs on the Economy? (pages 302–306)

A. Inflation Affects the Distribution of Income

B. The Problem with Anticipated Inflation

C. The Problem with Unanticipated Inflation