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(eBook PDF) Exploring Macroeconomics 5th Canadian

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Sexton Fortura KovacS
Exploring
Macro
Fifth Canadian Edition
Economics
vi Detailed Contents
3.4 Shifts in the Supply Curve 79 Business Connection: Revisiting the Production Possibilities
What Is the Difference between a Change in Supply and a Curve from a Macroeconomic Perspective 140
Change in Quantity Supplied? 79 For Your Review 142
What Are the Determinants of Supply? 79
Business Connection: Using Demand and Supply 82
Debate: Is It Ethical to Grow Corn for Fuel? 83 CHAPTER 6
Can We Review the Distinction between a Change in Supply Measuring Economic Performance 147
and a Change in Quantity Supplied? 84 6.1 National Income Accounting: Measuring Economic
For Your Review 87 Performance 147
Why Do We Measure Our Economy’s Performance? 147
CHAPTER 4 What Is Gross Domestic Product (GDP)? 148
BRINGING SUPPLY AND DEMAND TOGETHER 94 6.2 The Expenditure Approach to Measuring GDP 150
4.1 Market Equilibrium Price and Quantity 94 What Is the Expenditure Approach to Measuring Gdp? 150
What Are the Equilibrium Price and the Equilibrium Quantity? 94 What Is Consumption (C )? 150
What Is a Shortage and What Is a Surplus? 95 What Is Investment (I )? 152
Debate: Where There’s a Market, Should People Be Allowed to What Are Government Purchases (G )? 153
Trade Freely, without State Limitations or Intervention? 96 What Are Net Exports (X  M )? 153
Business Connection: Has GDP Run Its Time? 154
4.2 Changes in Equilibrium Price and Quantity 97
What Happens to Equilibrium Price and Equilibrium Quantity 6.3 The Income Approach to Measuring GDP 155
When the Demand Curve Shifts? 97 What Is the Income Approach to Measuring GDP? 155
What Happens to Equilibrium Price and Equilibrium Quantity What Do Personal Income and Disposable Income Measure? 157
When the Supply Curve Shifts? 99 6.4 Issues with Calculating an Accurate GDP 158
What Happens When Both Supply and Demand Shift in the What Are the Problems with Gdp in Measuring Output? 158
Same Time Period? 100 How Is Real Gdp Calculated? 158
Business Connection: Equilibrium Determines Price 101 What Is Real Gdp per Capita? 160
4.3 Price Controls 104 6.5 Problems with GDP as a Measure of Economic
What Are Price Controls? 104 Welfare 162
What Are Price Ceilings? 104 What Are Some of the Deficiencies of GDP as a Measure of
What Are Price Floors? 105 Economic Welfare? 162
For Your Review 108 Debate: Should We Switch to Another Means of Measuring
Macroeconomic Performance That Captures a More
CHAPTER 5 Comprehensive View of Economic Well-Being? 164
For Your Review 165
Introduction to the Macroeconomy 115
5.1 Macroeconomic Goals 115

CHAPTER 7
What Are the Three Major Macroeconomic Goals in Canada? 115
Are These Macroeconomic Goals Universal? 116 Economic Growth in the Global Economy 172
5.2 Employment and Unemployment 117 7.1 Economic Growth 172

What Is the Unemployment Rate? 117 How Does Economic Growth Differ from the Business Cycle? 172
Are Unemployment Statistics Accurate Reflections of the What Is Economic Growth? 173
Labour Market? 120 What Is the Rule of 70? 173
How Long is Someone Typically Unemployed? 120 7.2 Determinants of Economic Growth 176
What Is the Labour Force Participation Rate? 121 What Factors Contribute to Economic Growth? 176
5.3 Different Types of Unemployment 123 7.3 Public Policy and Economic Growth 180
What Is Frictional Unemployment? 123 What Policies Can a Nation Pursue to Increase
What Is Structural Unemployment? 124 Economic Growth? 180
What Is Cyclical Unemployment? 125 Business Connection: Slow(er) Growth Economy Ahead 181
What Is the Natural Rate of Unemployment? 125 Can Rates of Economic Growth between Different
5.4 Inflation 128 Economies Converge? 184
Why Is the Overall Price Level Important? 128 7.4 Population and Economic Growth 185
How Is Inflation Measured Using the Consumer Price What Is the Effect of Population Growth on per Capita
Index (CpI)? 128 Economic Growth? 185
Is the CPI Accurate? 130 What Is the Malthusian Prediction? 186
Who Are the Winners and Losers during Inflation? 132 Debate: Should Sustainable Growth Be the Goal or Maximum
What Are the Costs of Inflation? 133 Growth? 187
What Is the Relationship between Inflation and Interest For Your Review 189
Rates? 134
Debate: Should the Government Stay Focused on Inflation Rather
than Unemployment Rates? 135 CHAPTER 8
Aggregate Demand 192
5.5 Economic Fluctuations 136
What Are Short-Term Economic Fluctuations? 136 8.1 The Determinants of Aggregate Demand 192
What Are the Four Phases of a Business Cycle? 137 What Is Aggregate Demand? 192
How Long Does a Business Cycle Last? 139 What Is Consumption? 192
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Detailed Contents vii
Debate: Should There Be a Guaranteed Annual Income Benefit? 193 Business Connection: Corporate Navigation for a Change in
What Is Investment? 194 Long-Term Fiscal Goals 246
What Are Government Purchases? 194 What Are the Major Sources of Government Revenue? 247
What Are Net Exports? 194 Debate: Should Canada Raise Corporate Taxes? 248
8.2 The Investment and Saving Market 195 10.3 The Multiplier Effect 249
What Is the Investment Demand Curve? 196 What Is the Multiplier Effect? 249
What Is the Saving Supply Curve? 198 What Impact Does the Multiplier Effect Have on the
How Is Equilibrium Determined in the Investment and Aggregate Demand Curve? 251
Saving Market? 199 What Impact Does the Multiplier Effect Have on
What Effect Do Budget Surpluses and Budget Deficits Tax Cuts? 251
Have on the Investment and Saving Market? 199 What Factors Can Potentially Reduce the Size of the
8.3 The Aggregate Demand Curve 201
Multiplier? 253
How Is the Quantity of Real GDP Demanded Affected 10.4 Fiscal Policy and the AD/AS Model 253
by the Price Level? 201 How Can Fiscal Policy Alleviate a Recessionary Gap? 253
Why Is the Aggregate Demand Curve Negatively Sloped? 201 How Can Fiscal Policy Alleviate an Inflationary Gap? 255
8.4 Shifts in the Aggregate Demand Curve 203 10.5 Automatic Stabilizers 256
What Variables Cause the Aggregate Demand Curve to Shift? 203 What Are Automatic Stabilizers? 256
Business Connection: Changes in GDP: The Long and the Short How Does the Tax System Stabilize the Economy? 256
of It 204
Can We Review the Determinants That Change Aggregate 10.6 Possible Obstacles to Effective Fiscal Policy 257
Demand? 206 How Does the Crowding-Out Effect Limit the Economic
For Your Review 207 Impact of Expansionary Fiscal Policy? 257
How Do Time Lags in Fiscal Policy Implementation Affect
CHAPTER 9 Policy Effectiveness? 259
Aggregate Supply and Macroeconomic 10.7 The Federal Government Debt 261
Equilibrium 211 How Is the Budget Deficit Financed? 261
9.1 The Aggregate Supply Curve 211 What Has Happened to the Federal Budget Balance? 261
What Is the Aggregate Supply Curve? 211 What Is the Impact of Reducing a Budget Deficit? 262
Why Is the Short-Run Aggregate Supply Curve Positively How Much Is the Burden of Government Debt in Canada? 263
Sloped? 211 or Your Review 266
F
Why Is the Long-Run Aggregate Supply Curve Vertical at the
Natural Rate of Output? 212 CHAPTER 11
9.2 Shifts in the Aggregate Supply Curve 214 Money and the Banking System 271
What Factors of Production Affect the Short-Run and Long- 11.1 What Is Money? 271
Run Aggregate Supply Curves? 214 What Is Money? 271
What Factors Exclusively Shift the Short-Run Aggregate What Are the Four Functions of Money? 271
Supply Curve? 215
Can We Review the Determinants That Change Aggregate 11.2 Measuring Money 273
Supply? 216 What Is Currency? 273
What Are Demand and Savings Deposits? 274
9.3 Macroeconomic Equilibrium 217
What Is Liquidity? 276
How Is Macroeconomic Equilibrium Determined? 217
How Is the Money Supply Measured? 276
What Are Recessionary and Inflationary Gaps? 218
What Backs the Money Supply? 278
How Can the Economy Self-Correct to a Recessionary Gap? 221
How Can the Economy Self-Correct to an Inflationary Gap? 223 11.3 How Banks Create Money 279
Price Level and RGDP Over Time 223 What Types of Financial Institutions Exist in Canada? 279
Business Connection: Facing the Storm Clouds: Low Inflation How Do Banks Create Money? 280
and Deflation 224 What Does a Bank Balance Sheet Look Like? 281
For Your Review 225 What Is a Desired Reserve Ratio? 282
Appendix: The Keynesian Aggregate Expenditure Model 231
Business Connection: Dancing with Debt and the Money
The Simple Keynesian Aggregate Expenditure Model 231 Supply 285
Consumption in the Keynesian Model 233 11.4 The Money Multiplier 286
Equilibrium in the Keynesian Model 235 How Does the Multiple Expansion of the Money Supply
Disequilibrium in the Keynesian Model 235 Process Work? 286
Adding Investment, Government Purchases, and Net Exports 237 What Is the Money Multiplier? 287
For Your Review 241 Why Is It Only “Potential” Money Creation? 288
Debate: Should Canada Become a Cashless Society? 289
CHAPTER 10 For Your Review 290
Fiscal Policy 243
10.1 Fiscal Policy 243 CHAPTER 12
What Is Fiscal Policy? 243 The Bank of Canada 296
How Does Fiscal Policy Affect the Government’s Budget? 244
12.1 The Bank of Canada 296
10.2 Government: Spending and Taxation 245 What Is the Bank of Canada? 296
What Are the Major Categories of Government Spending? 245 What Are the Main Responsibilities of the Bank of Canada? 298
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viii Detailed Contents
Debate: Should Canada, the United States, and Mexico Share a What International Trade Agreements Is Canada
Common Currency? 299 Involved In? 337
Debate: Should Canada Cut Back on Trade with China? 339
12.2 Tools of the Bank of Canada 300
What Are the Tools of the Bank of Canada? 300 14.3 Comparative Advantage and Gains from Trade 340
What Is the Bank of Canada’s Approach to Monetary Policy? 303 Why Do Economies Trade? 340
Business Connection: When the Bank Rate Increases, What Is the Principle of Comparative Advantage? 340
Beware! 303
14.4 Supply and Demand in International Trade 343
12.3 Money and Inflation 304 What Are Consumer Surplus and Producer Surplus? 343
What Is the Equation of Exchange? 305 Who Benefits and Who Loses When a Country Becomes an
What Is the Quantity Theory of Money and Prices? 306 Exporter? 344
For Your Review 308 Who Benefits and Who Loses When a Country Becomes an
Importer? 346
CHAPTER 13 14.5 Tariffs, Import Quotas, and Subsidies 347
Monetary Policy 310 What Is a Tariff? 347
What Is the Impact of Tariffs on the Domestic Economy? 347
13.1 Money, Interest Rates, and Aggregate Demand 310 What Are Some Arguments in Favour of Tariffs? 349
What Determines the Money Market? 310 What Are Import Quotas? 350
How Does the Bank of Canada Affect RGDP in the What Is the Impact of Import Quotas on the Domestic
Short Run? 312 Economy? 351
Does the Bank of Canada Target the Money Supply or the What Is the Economic Impact of Subsidies? 352
Interest Rate? 314 For Your Review 353
Which Interest Rate Does the Bank of Canada Target? 314
Does the Bank of Canada Influence the Real Interest Rate in
the Short Run? 315 CHAPTER 15
13.2 Expansionary and Contractionary Monetary Policy 316 International Finance 358
How Does Expansionary Monetary Policy Work in a 15.1 The Balance of Payments 358
Recessionary Gap? 316 What Is the Balance of Payments? 358
How Does Contractionary Monetary Policy Work in an What Is the Current Account? 358
Inflationary Gap? 318 What Is the Capital Account? 360
How Does Monetary Policy Work in the Open Economy? 319 What Is the Statistical Discrepancy? 361
Debate: Should Bank of Canada Appointments Remain out of
Voters’ Hands? 320 15.2 Exchange Rates 362
What Are Exchange Rates? 362
13.3 Problems in Implementing Monetary and Fiscal Debate: Is a Low Loonie Good for Canada’s Economy? 364
Policy 321 How Are Exchange Rates Determined? 365
What Problems Exist in Implementing Monetary and Business Connection: Managing Transaction Risks 366
Fiscal Policy? 321
15.3 Equilibrium Changes in the Foreign Exchange
13.4 The Phillips Curve 325 Market 367
What Is the Phillips Curve? 326 What Are the Major Determinants in the Foreign Exchange
How Does the Phillips Curve Relate to the Aggregate Supply Market? 367
and Demand Model? 327
Business Connection: Getting a Jump on Inflation in 15.4 Flexible Exchange Rates 371
Modern Times 328 How Are Exchange Rates Determined Today? 371
For Your Review 329 What Are the Advantages of a Flexible Exchange
Rate System? 372
CHAPTER 14 What Are the Disadvantages of a Flexible Exchange
Rate System? 373
International Trade 332
For Your Review 375
14.1 Canada’s Merchandise Trade 332
Who Are Canada’s Trading Partners? 332 Answers to Odd-Numbered Problems 379
What Does Canada Import and Export? 332
Business Connection: What a Difference a Few Years Make in Glossary 393
Business and Politics 334
14.2 International Trade Agreements 336 Index 396
What Has Been the Impact of International Trade
on Canada? 336 Chapters in Review
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About the Authors
Robert L. Sexton is Distinguished Professor of Economics at Pepperdine University.

Professor Sexton has also been a Visiting Professor at the University of California at
Los Angeles in the Anderson Graduate School of Management and the Department
of Economics.
Professor Sexton’s research ranges across many fields of economics: economics edu-
cation, labour economics, environmental economics, law and economics, and economic
history. He has written several books and been published in many top economic jour-
Pepperdine University
nals such as the American Economic Review, the Southern Economic Journal, Economics
Letters, the Journal of Urban Economics, and the Journal of Economic Education. Professor
Sexton has also written more than 100 other articles that have appeared in books, maga-
zines, and newspapers.
Professor Sexton received the Pepperdine Professor of the Year Award in 1991, the
Harriet and Charles Luckman Teaching Fellow in 1994, the Tyles Professor of the Year
in 1997, and the Howard A. White Award for Teaching Excellence in 2011.
Peter N. Fortura earned his undergraduate degree from Brock University, where he
was awarded the Vice-Chancellor’s Medal for academic achievement, and his Master
of Arts from the University of Western Ontario in London, Ontario. He has taught
economics at Algonquin College in Ottawa for over 20 years. Prior to that, he was an
economist in the International Department of the Bank of Canada in Ottawa.
Professor Fortura has published articles on Canadian housing prices, Canada’s auto-
motive industry, and Canada’s international competitiveness. As well, he is an author
of the Study Guide to accompany Principles of Macroeconomics by Mankiw, Kneebone,
Peter Fortura
and McKenzie (Nelson Education, 7th edition), and co-author of the statistics textbook
Contemporary Business Statistics with Canadian Applications (Pearson, 3rd edition).
He lives in Ottawa with his wife, Cynthia, and their children, Laura and Nicholas.
Colin C. Kovacs received his Master of Arts degree from Queen’s University after
completing his Bachelor of Arts degree at the University of Western Ontario. He has
taught economics, statistics, and finance for nearly 25 years at both the DeVry College
of Technology in Toronto and Algonquin College in Ottawa. His research papers have
included Determinants of Labour Force Participation Among Older Males in Canada and
Minimum Wage—The Past and Future for Ontario.
He lives in Ottawa with his wife, Lindsay, and their children, Rowan, Seth, and
Myles.
Algonquin College
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Preface
Exploring Macroeconomics, Fifth Canadian Edition, offers students a lively, back-to-the-

basics approach designed to take the intimidation out of economics. With its short, self-
contained active learning units and its carefully chosen pedagogy, graphs, and photos, this
text helps students master and retain the principles of economics. In addition, the current-
events focus and modular format of presenting information makes Exploring Macroeconomics
a very student-accessible and user-friendly text. Driven by more than 70 years of combined
experience teaching the economic principles course, the d edication and enthusiasm of Bob
Sexton, Peter Fortura, and Colin Kovacs shine through in Exploring Macroeconomics.
New To The FIFTH Canadian Edition

Overall Highlights
As with previous editions of Exploring Macroeconomics, attention has been paid to the
structure and layout of each chapter to ensure that the material is presented in as clear
and consistent a manner as possible. In addition, special attention has been given to the
numerous examples and illustrations presented in each chapter to ensure they are mean-
ingful and relevant to today’s student.
The end-of-chapter For Your Review questions and problems have been continued
in this edition. Blueprint Problems, the review feature introduced in the previous edi-
tion, have been retained and have undergone revision to ensure they continue to pro-
vide relevant and meaningful insight into the methodologies surrounding key economic
concepts. As in the previous edition, all Blueprint Problems are accompanied by full and
annotated solutions.
Also returning in this fifth edition are the Debate and Business Connection features.
Both have undergone revision and updating. While their content has been revised, the
purpose of each feature remains the same—Debate features are designed to promote
in-class discussion and self-exploration, and Business Connection features are designed to
highlight the link between economic theory and business principles.
Finally, where relevant, Canadian content has been added and all statistical infor-
mation has been updated. For example, the data accompanying the discussion of
unemployment, inflation, and economic growth in Chapter 5 has been updated to
include the most recent figures available and expanded to cover a variety of other econ-
omies. The addition of international data gives the reader the opportunity to evaluate
the performance of the Canadian economy from a global perspective, thereby deepening
understanding of these central macroeconomic goals.
Chapter Highlights
Chapter 4: Bringing Supply and Demand Together
In this chapter, readers will find an expanded discussion of the existence of price con-
trols in the Canadian economy. An investigation of Canadian dairy production and the
pricing of dairy products in Canada are provided, giving the reader a more in-depth
understanding of this key topic and how it impacts the efficiency of market forces in
Canada.
x NEL
Preface xi
Chapter 5: Introduction to the Macroeconomy

International unemployment, the inflation rate, and economic growth data have been
integrated into the domestic discussion of these three central economic topics. Their
inclusion provides a valuable global context in which the performance of the Canadian
economy can be better evaluated. A second feature added to Chapter 5 relates to the
accuracy of the Consumer Price Index (CPI) as a measure of prices and of price level
changes. This added discussion provides necessary insight into the complexities involved
in measuring changes to an economies price level using the CPI methodology.
Chapter 6: Measuring Economic Performance

The discussion detailing the income approach to calculating gross domestic product has
been re-worked in the latest edition of this chapter. This revised discussion provides
greater clarity and detail to this key measure of economic performance.
Chapter 7: Economic Growth in the Global Economy

An expanded discussion explaining the impact of physical capital on labour productivity
is now part of the Determinants of Economic Growth section of Chapter 7. In addition,
a detailed numerical example accompanies the discussion to provide valuable illustration
and clarification.
Chapter 11: Money and the Banking System

Greater detail has been added to the section outlining the evolution of the monetary
aggregates M2 and M2+ in Canada. This added detail provides valuable insight into the
evolving nature of savings among Canadian households.
Chapter 13: Monetary Policy

The nonconventional forms of monetary policy that emerged as a result of the global
financial crisis are acknowledged and detailed in the newly expanded discussion of
monetary policy.
Features Of The Book

The Section-by-Section Approach
Exploring Macroeconomics uses a section-by-section approach in which economic ideas
and concepts are presented in short, self-contained units rather than in large blocks of
text. Each chapter is composed of approximately four to six bite-sized sections, with
each section typically presented in two to eight pages that include all of the relevant
graphs, tables, applications, features, photos, and definitions for the topic at hand. Our
enthusiasm for and dedication to this approach stems from studying research on learning
theory, which indicates that students retain information much better when it is broken
down into short, intense, and exciting bursts of “digestible” information. Students prefer
information divided into smaller, self-contained sections that are less overwhelming,
more manageable, and easier to review before going on to new material. In short, stu-
dents will be more successful in mastering and retaining economic principles using this
approach, which is distinctly more compatible with modern communication styles.
But students aren’t the only ones to benefit from this approach. The self-contained
sections allow instructors greater ﬂexibility in planning their courses. They can simply
select or delete sections of the text as it fits their syllabus.
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xii Preface
Highlighted Learning Tools

Key Questions Each section begins with key questions
designed to preview ideas and to pique students’ interest in
the material to come. These questions are then used to struc-
ture the section material that follows, each question being
prominently displayed as a section heading, with additional
subheadings provided as needed. In addition to ensuring a
clear instructional layout of each section and chapter, these
key questions can also be used by students as a review resource.
After reading the section material, if students are able to answer
the key questions, they can go forward with confidence.
Section Checks A Section Check appears at the end of

each section and is designed to summarize the answers to
the key questions posed at the beginning of the section.
The summaries provided by the Section Check give students
an opportunity to evaluate their understanding of major
ideas before proceeding.
Debate Features Debate features are designed to

rovide students with an opportunity to develop and
p
express their opinions about a variety of economic issues.
The “For” and “Against” arguments that accompany each
debate topic make it easy to use these features to initiate
in-class discussions. By engaging in informal debate
regarding current economic policy, students will be able to
link course content to current events as well as to their own
personal lives. Questions have been added to encourage
critical thinking.
Business Connection Features Business Connection

features are designed to help students see the link between
economic theory and business fundamentals. They help
students better understand the reasoning behind the empirical
validity of economic theory and also aid in the grounding
of abstract economic theory in modern business principles.
Accompanying each Business Connection feature are questions
that can be used to either evaluate student understanding or
initiate in-class discussion.
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Preface xiii
Photos Exploring Macroeconomics contains a large

number of colourful photos, which are an integral
part of the book for both learning and motivation.
The photos are carefully placed where they reinforce
important concepts, and they are accompanied by
captions designed to extend students’ understanding of
particular ideas.
For Your Review Provided at the end of each chapter,

these problems allow students to test their understanding
of chapter concepts. The For Your Review problems are
organized into sections to match the corresponding
sections in the text so that students and instructors can
easily identify particular topics. To assist in the learning
process, solutions to all odd-numbered problems are
provided at the back of the text. With a variety of both
problems and application-style questions to choose from,
this section can also be used by instructors to assign
homework directly from the text.
Blueprint Problems Integrated into the end-of-

chapter For Your Review sections, these fully annotated
problems and their solutions are intended to provide
additional insight into key economic topics and issues.
Intentionally designed to mirror the accompanying For
Your Review problems, each Blueprint Problem allows
students to “walk through” a complete solution, seeing
the essential steps necessary to successfully complete a
key economic question.
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xiv Preface
Chapter in Review Cards Located at the back of

the textbook, these detachable Chapter in Review cards
are designed to give students a summary overview of key
chapter concepts at a glance. Each Chapter in Review card
contains the following information:
• Chapter Summary A point-form summary response
to the section’s key questions, highlighting the most
important concepts of each section, is provided.
• Key Terms A list of key terms allows students to test
their mastery of new concepts. Both the definition and
the page number are included so that students can easily
find a key term in a chapter.
• Key Exhibits/Graphs Given the importance and
explanatory ability of exhibits and graphical representa-
tions in economics, a list of key figures is provided for
each chapter.
• Key Equations A list of key equations enables students
to quickly refer to important formulas.
INSTRUCTORS
The Nelson Education Teaching Advantage (NETA) program delivers research-based
instructor’s resources that promote student engagement and higher-order thinking
to enable the success of Canadian students and educators. Be sure to visit Nelson
Education’s Inspired Instruction website at www.nelson.com/inspired to find out more
about NETA. Don’t miss the testimonials of instructors who have used NETA supple-
ments and watched student engagement increase!
The following instructor’s resources have been created for Exploring Macroeconomics,
Fifth Canadian Edition. Access these ultimate tools for customizing lectures and presen-
tations at www.nelson.com/instructor.
Instructor’s Solutions Manual: Answers to all For Your Review questions in the textbook
are provided in this manual, now separated from the Instructor’s Manual for easier
reference. Students can access only the odd-numbered solutions in the Answer Key at the
back of the book. The solutions were prepared by the text co-author, Colin Kovacs, and
independently checked for accuracy by Racquel Lindsay, University of Toronto.
NETA Test Bank: This resource was prepared by Russell Turner, Fleming College. It
includes over 1775 multiple-choice questions written according to NETA guidelines
for effective construction and development of higher-order questions. Also included are
more than 290 true/false and more than 130 essay-type questions.
The NETA Test Bank is available in a new, cloud-based platform. Nelson Testing
Powered by Cognero® is a secure online testing system that allows you to author, edit,
and manage test bank content from any place you have Internet access. No special
installations or downloads are needed, and the desktop-inspired interface, with its
drop-down menus and familiar, intuitive tools, allows you to create and manage tests
with ease. You can create multiple test versions in an instant, and import or export
content into other systems. Tests can be delivered from your learning management
system, your classroom, or wherever you want. Nelson Testing Powered by Cognero for
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Preface xv
Exploring Macroeconomics can also be accessed through http://www.nelson.com/login

and http://login.cengage.com. Printable versions of the Test Bank in Word and PDF
versions are available with the instructor’s resources for the textbook.
NETA PowerPoint: Microsoft® PowerPoint® lecture slides for every chapter have been
adapted by Ifeanyichukwu Uzoka of Sheridan College. We offer two separate collections.
The Basic PowerPoint collection contains an average of 40 slides per chapter. This col-
lection is a basic outline of the chapter and contains key figures, tables, and photographs
from the fifth Canadian edition of Exploring Macroeconomics. The Expanded PowerPoint
collection includes an average of 60 slides per chapter and provides a more complete
overview of the chapter. NETA principles of clear design and engaging content have
been incorporated throughout, making it simple for instructors to customize the deck
for their courses.
Image Library: This resource consists of digital copies of figures, short tables, and
photographs used in the book. Instructors may use these images to customize the NETA
PowerPoint or create their own PowerPoint presentations.
Instructor’s Manual: The Instructor’s Manual to accompany Exploring Macroeconomics,
Fifth Canadian Edition, has been prepared by Phil Ghayad and Michel Mayer of
Dawson College. This manual is organized according to the textbook chapters and
includes teaching tips and active learning exercises. (Answers to all For Your Review
exercises in the text are now provided in the separate Instructor’s Solutions Manual
supplement described earlier.)
DayOne: Day One—Prof InClass is a PowerPoint presentation that instructors can cus-
tomize to orient students to the class and their textbook at the beginning of the course.
Aplia 1 MindTap
MindTap is the digital platform that propels students from memorization to mastery,
helping to challenge them, build their confidence, and empower them to be unstop-
pable. ApliaTM is an application in the MindTap platform that has proven to significantly
improve outcomes and elevate thinking by increasing student effort and engagement.
Aplia makes it easy to assign frequent online homework assignments and assessments,
ensuring students master important concepts. Developed by teachers, Aplia assignments
connect concepts to the real world and focus on the unique course challenges faced by
students. The MindTap content for Exploring Macroeconomics, Fifth Canadian Edition,
was updated and revised by Jason Dean of Sheridan College. The Aplia problems for
Exploring Macroeconomics, Fifth Canadian Edition, were updated and revised by Hanika
Bhojwani-Chen of Centennial College.
The challenging and interactive activities within Aplia guide students through
assignments, moving them from basic knowledge and understanding to application and
practice. Look for the Aplia logo in the MindTap app dock to explore all that Aplia has
to offer. With Aplia, instructors can do the following:
• easily set their course with pre-built, flexible homework assignments;
• author questions (single choice, multiple choice, true/false, essay and numeric entry);
• create custom assignments and populate them with self-authored—and Aplia-
authored—questions; and
• inspire students to learn from their mistakes and reward them for effort with the Grade
It Now feature that enables three attempts at different versions of a question.
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xvi Preface
Student Ancillaries
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Acknowledgments
Producing the fifth Canadian edition of Exploring Macroeconomics has truly been a
team effort. We would like to thank the editorial, production, and marketing teams at
Nelson Education for their hard work and effort. First, our appreciation goes to Claudine
O’Donnell, Vice President, Product Solutions, who has provided the vision and leader-
ship for the Canadian editions of the text.
We would like to thank Katherine Baker-Ross, publisher at Nelson, for her con-
tinuing support. Thank you to Katherine Goodes, Content Manager, for her helpful
advice and constant encouragement. Thanks also to Imoinda Romain, Senior Production
Project Manager; June Trusty, Copy Editor; Marcia Siekowski, Marketing Manager; and
all the marketing and sales representatives at Nelson. Special thanks are extended to
Darren Chapman at Fanshawe College for providing the engaging and insightful Business
Connection and Debate features.
We are grateful to our families for their patience and encouragement.
Finally, we would like to acknowledge the reviewers of the Canadian editions, past
and present, for their comments and feedback:
Sarah Arliss, Seneca College

Vick Barylak, Sheridan College
Aurelia Best, Centennial College
Ramesh Bhardwaj, George Brown College
Michael Bozzo, Mohawk College
Jim Butko, Niagara College
Lewis Callahan, Lethbridge College
Darren Chapman, Fanshawe College
Robert Dale, Algonquin College
Carol Derksen, Red River College
Jeffrey Dzikowicz, Red River College
Bruno Fullone, George Brown College
Alexander Gainer, University of Alberta
Phillipe Ghayad, Dawson College
James Hnatchuk, Champlain College Saint-Lambert
Michael Leonard, Kwantlen Polytechnic University
Margaret Rose Olfert, University of Saskatchewan
Geoffrey Prince, Centennial College
Norm Smith, Georgian College
Martha Spence, Confederation College
Sarah J. Stevens, Georgian College
Carl Weston, Mohawk College
Their thoughtful suggestions were very important to us in providing input and useful
examples for the fifth Canadian edition of this book.
P.N.F.
c.c.k.
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chapter
1
The Role and Method
of Economics
1.1 ECONOMICS: A BRIEF INTRODUCTION 1.6 INCENTIVES MATTER (Page 19)

(Page 1)
1.7 SPECIALIZATION AND TRADE (Page 21)
1.2 ECONOMIC THEORY (Page 4)
1.8 THE THREE ECONOMIC QUESTIONS EVERY
1.3 SCARCITY (Page 10) SOCIETY FACES (Page 23)
1.4 OPPORTUNITY COST (Page 12) APPENDIX: WORKING WITH GRAPHS

(Page 32)
1.5 MARGINAL THINKING (Page 15)
section
Economics: A Brief Introduction 1.1
•• What is economics?
•• Why study economics?
•• What distinguishes macroeconomics from microeconomics?
What is Economics?
Some individuals think economics involves the study of the stock market and corpo-
rate finance, and it does—in part. Others think that economics is concerned with the
wise use of money and other matters of personal finance, and it is—in part. Still others
think that economics involves forecasting or predicting what business conditions will
be like in the future, and again, it does—in part.
Growing Wants and Scarce Resources economics

Precisely defined, economics is the study of the allocation of our limited resources to the study of the allocation of our
limited resources to satisfy our
satisfy our unlimited wants. Resources are inputs—such as land, human effort and unlimited wants
skills, and machines and factories—used to produce goods and services. The problem
is that our wants exceed our limited resources, a fact that we call scarcity. Scarcity forces resources
inputs used to produce goods
us to make choices on how to best use our limited resources. This is the economic and services
problem: Scarcity forces us to choose, and choices are costly because we must give
up other opportunities that we value. This economizing problem is evident in every the economic problem
Scarcity forces us to choose,
aspect of our lives. Choosing between a trip to the gym or the coffee shop, or between and choices are costly because
finishing an assignment or chatting online, can be understood more easily when one we must give up other oppor-
has a good handle on the “economic way of thinking.” tunities that we value.
NEL 1
Copyright 2020 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content
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Exploring Macroeconomics
2 Chapter one | The Role and Method of Economics
Economics Is All Around Us

Although many things that we desire in life are con-
sidered to be “noneconomic,” economics concerns
anything that is considered worthwhile to some
human being. For instance, love, sexual activity,
and religion have value for most people. Even these
have an economic dimension. Consider love and
sex, for example. One product of love—the insti-
Anatoliy Babiy/iStock/Thinkstock
tution of the family—is an important economic

decision-making unit. Also, sexual activity results
in the birth of children, one of the most impor-
tant “goods” that many humans want. Economic
forces have played a central role in the evolution
of the family unit, from the traditional “nuclear
family” (Dad, Mom, and two kids) to dual-income
Articles related to economics— families, to dual-income no-kids (DINKs) families. Concerns for spiritual matters
either directly or indirectly—
are common in the news
have likewise received economists’ scrutiny, as they have led to the development of
media. News headlines might institutions such as churches, mosques, and temples that provide religious and spiritual
trumpet: Gasoline Prices services. These services are goods that many people want.
Soar; Stocks Rise; Stocks Even time has an economic dimension. In fact, perhaps the most precious
Fall; Prime Minister Vows to
Increase National Defence single resource is time. We all have the same limited amount of time per day, and how
Spending; Health-Care Costs we divide our time between work and leisure (including perhaps study, sleep, exercise,
Continue to Rise. etc.) is a distinctly economic matter. If we choose more work, we must sacrifice leisure.
If we choose to study, we must sacrifice time with friends, or time spent sleeping or
watching TV. Virtually everything we decide to do, then, has an economic dimension.
Living in a world of scarcity involves trade-offs. As you are reading this text, you are
giving up other things you value, such as shopping, spending time on Facebook, text mes-
saging with friends, going to the movies, sleeping, or working out. When we know what
the trade-offs are, we can make better choices from the options all around us, every day.
Why Study Economics?

Among the many good reasons to study economics, perhaps the best reason is that so
many of the things of concern in the world around us are at least partly economic in
character. A quick look at media headlines reveals the vast range of problems that are
related to economics—global warming, health care, education, and social assistance.
The study of economics improves your understanding of these concerns. A student
of economics becomes aware that, at a basic level, much of economic life involves
choosing among alternative possible courses of action—making choices between
our conflicting wants and desires in a world of scarcity. Economics provides some clues
as to how to intelligently evaluate these options and determine the most appropriate
choices in given situations. But economists learn quickly that there are seldom easy,
clear-cut solutions to the problems we face: The easy problems were solved long ago!
Many students take introductory postsecondary economics courses because these
are part of the core curriculum requirements. But why do the committees that establish
these requirements include economics? In part, economics helps develop a disciplined
method of thinking about problems as opposed to simply memorizing solutions. The
problem-solving tools you will develop by studying economics will prove valuable to you
in both your personal and professional life, regardless of your career choice. In short, the
study of economics provides a systematic, disciplined way of thinking.
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Economics: A Brief Introduction 3
Using This Stuff

The basic tools of economics are valuable to people in all walks of life and in all career
paths. Journalists benefit from economics because the problem-solving perspective
it teaches trains them to ask intelligent questions whose answers will better inform
their readers. Engineers, architects, and contractors usually have alternative ways to
build. Architects learn to combine technical expertise and artistry with the limita-
tions imposed by finite resources. That is, they learn how to evaluate their options
from an economic perspective. Business owners face similar problems, because costs
are a constraint in both creating and marketing a new product. Will the added cost of
developing a new and improved product be outweighed by the added sales revenues
that are expected to result? Economists can, however, pose these questions and provide
criteria that business owners can use in evaluating the appropriateness of one design as
compared to another. The point is that the economic way of thinking causes those in
many types of fields to ask the right kind of questions.
What Distinguishes Macroeconomics from

Microeconomics?
Like psychology, sociology, anthropology, and political science, economics is considered
a social science. Economics, like the other social sciences, is concerned with reaching
generalizations about human behaviour. Economics is the study of people. It is the
social science that studies the choices people make in a world of limited resources.
Economics and the other social sciences often complement one another. For
example, a political scientist might examine the process that led to the adoption of a
certain tax policy, whereas an economist might analyze the impact of that tax policy. Or,
whereas a psychologist may try to figure out what makes the criminal mind work, an
economist might study the factors causing a change in the crime rate. Social scientists, macroeconomics
then, may be studying the same issue but from different perspectives. the study of the aggregate
Conventionally, we distinguish two main branches of economics: macroeconomics economy, including the topics
and microeconomics. Macroeconomics is the study of the aggregate or total economy; of inflation, unemployment, and
economic growth
it looks at economic problems as they influence the whole of society. Topics covered
in macroeconomics include discussions of inflation, unemployment, business cycles, aggregate
and economic growth. Microeconomics is the study of the smaller units within the the total amount—such as the
aggregate level of output
economy. Topics include the decision-making behaviour of firms and households and
their interaction in markets for particular goods or services. Microeconomic topics also microeconomics
include discussions of health care, agricultural subsidies, the price of everyday items the study of the smaller units
within the economy, including
such as running shoes, the distribution of income, and the impact of labour unions on the topics of household and firm
wages. To put it simply, microeconomics looks at the trees whereas macroeconomics behaviour and how they interact
looks at the forest. in the marketplace
Section Check
■■ Economics is the study of the allocation of our limited resources to satisfy our
unlimited wants.
■■ Economics is a problem-solving social science that teaches you how to ask
intelligent questions.
■■ Macroeconomics deals with the aggregate, or total, economy, while micro-
economics focuses on smaller units within the economy.
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4 Chapter one | The Role and Method of Economics
section
1.2 Economic Theory
•• What are economic theories?
•• Why do we need to abstract?
•• What is a hypothesis?
•• What is the ceteris paribus assumption?
•• Why are observations and predictions harder in the social sciences?
•• What distinguishes between correlation and causation?
•• What are positive analysis and normative analysis?
What are Economic Theories?

theory A theory is an established explanation that accounts for known facts or phenomena.
an established explanation that Specifically, economic theories are statements or propositions about patterns of human
accounts for known facts or
behaviour that are expected to take place under certain circumstances. These theories
phenomena
help us to sort out and understand the complexities of economic behaviour. We expect
a good theory to explain and predict well. A good economic theory, then, should help
us to better understand and, ideally, predict human economic behaviour.
Why do we Need to Abstract?

How is economic theory like Economic theories cannot realistically include every event that has ever occurred. This is
a GPS? Because of the com- true for the same reason that a newspaper or history book does not include every world
plexity of human behaviour,
economists must abstract to
event that has ever happened. We must abstract. Without abstraction or simplification,
focus on the most important the world is too complex to analyze.
components of a particular Economic theories and models make some unrealistic assumptions. For example, we
problem. This is similar to
how a GPS highlights the
may assume there are only two countries in the world, producing two goods. Obviously,
important information (and this is an abstraction from the real world. But if we can understand trade in a simpli-
does not register many minor fied world, it will help us understand trade in a more complex world. Similarly, some-
details) to help people get times economists make very strong assumptions, such as the assumption that all people
from here to there.
seek self-betterment or all firms attempt to
maximize profits. That is, economists use
simplifying assumptions in their models to
make the world more comprehendible. But
only when we test our models using these
assumptions can we find out if they are too
simplified or too limiting.
How are economic theories and models
like a road map? A road map of Canada may
not include every creek, ridge, and valley
between Vancouver and Halifax—indeed,
Rafal Olechowski/iStock / Thinkstock
such an all-inclusive map would be too com-

plicated and confusing to be of much value.
However, a GPS programmed to guide
the traveller while referencing key details
encountered along the way, such as highways
and major attractions, will provide enough
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Economic Theory 5
information to travel by car from Vancouver to Halifax. Likewise, an economic theory

provides a broad view, not a detailed examination, of human economic behaviour.
What is a Hypothesis?
The beginning of any theory is a hypothesis, a testable proposition that makes some hypothesis
type of prediction about behaviour in response to certain changes in conditions. In eco- a testable proposition
nomic theory, a hypothesis is a testable prediction about how people will behave or react
to a change in economic circumstances. For example, if the price of iPads increased, we
might hypothesize that fewer iPads would be sold, or if the price of iPads fell, we might
hypothesize that more iPads would be sold. Once a hypothesis is stated, it is tested by
comparing what it predicts will happen to what actually happens.
Using Empirical Analysis

To see whether a hypothesis is valid, we must engage in an empirical analysis. That is, empirical analysis
we must examine the data to see whether the hypothesis fits well with the facts. If the the examination of data to see
whether the hypothesis fits well
hypothesis is consistent with real-world observations, it is accepted; if it does not fit
with the facts
well with the facts, it is “back to the drawing board.”
Determining whether a hypothesis is acceptable is more difficult in economics than
it is in the natural or physical sciences. Chemists, for example, can observe chemical
reactions under laboratory conditions. They can alter the environment to meet the
assumptions of the hypothesis and can readily manipulate the variables (chemicals, tem-
peratures, and so on) crucial to the proposed relationship. Such controlled experimenta-
tion is seldom possible in economics. The laboratory of economists is usually the real
world. Unlike a chemistry lab, economists cannot easily control all the other variables
that might influence human behaviour.
From Hypothesis to Theory

After gathering their data, economic researchers must then evaluate the results to
determine whether the hypothesis is supported or refuted. If supported, the hypothesis
can then be tentatively accepted as an economic theory.
Economic theories are always on probation. A hypothesis is constantly being tested
against empirical findings. Do the observed findings support the prediction? When a
hypothesis survives a number of tests, it is accepted until it no longer predicts well.
What is the Ceteris Paribus Assumption?

Virtually all economic theories share a condition usually expressed by use of the
Latin expression ceteris paribus. This roughly means “let everything else be equal” ceteris paribus
or “holding everything else constant.” In trying to assess the effect of one variable on holding everything else constant
another, we must isolate their relationship from other events that might also influence
the situation that the theory tries to explain or predict. To make this clearer, we will
illustrate this concept with a couple of examples.
Suppose you develop your own theory describing the relationship between studying
and exam performance: If I study harder, I will perform better on the test. That sounds
logical, right? Holding other things constant (ceteris paribus), this is likely to be true.
However, what if you studied harder but inadvertently overslept the day of the exam?
What if you were so sleepy during the test that you could not think clearly? Or what if
you studied the wrong material? Although it may look as if additional studying did not
improve your performance, the real problem may lie in the impact of other variables,
such as sleep deficiency or how you studied.
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more terrible vengeance—one that would strike terror into the heart
of the Burning Cloud as well. And yet the leaving of a scalp so easily
to be obtained, and one that would bring him so much of renown,
was hard for his nature—the most severe trial of his life thus far.
But might it not be that he could force the squaw to become his wife
—or at least bribe her to do so—the bribe being her lover's life?
It was as he conceived a brilliant idea, and drawing back without
staining his soul or his hands with murder, he left the sleeper to his
rest, and followed the girl to the wigwam—saw her—related what he
had seen, and attempted to carry out his plans.
But she laughed at him and his threats, and when he told the story to
the warriors, dared him to the proof.
"The morning will decide," he said, sullenly.
And decide it did. The warriors and the spy and the girl went to the
spot he designated, and found nothing of any such place of
concealment as he had described, but a torrent foaming through the
rocky gorge that bore no impress of ever having been in another
place since creation!
CHAPTER X.
THE TORTURES OF THE MEDICINE.
With the white Medicine completely in his power and at his mercy,
the red one determined to make him reveal every secret charm and
mystery—every trick of juggling that he could possibly turn to
account to extend his influence over the tribe.
To do this he must be certain that no one should be any the wiser—
that there was no spy upon his movements, and so he gave public
notice that the Manitou would be very angry with any one who even
visited the vicinity where he was confined.
In this respect at least he was obeyed, for there was no longer any
interest taken in his fate, and the more especially as they believed
the scout was dead, and the white girl had stolen away, and most
likely perished in the wilderness.
With matters thus arranged it was easy for him to carry out his
purposes without danger of molestation, and he secretly took his
departure for the cavern, removed a sufficiency of the wall to enable
him to creep through, replaced it again to baffle any curious eyes,
and lighting a taper (formed of wax and bear's grease) took his place
by the fettered and helpless prisoner, and began tormenting him,
though at first by words.
"How does the pale-faced dog like the prison-house of the red-
man?" he questioned, in a sneering voice.
"It is a good place to die as any other," replied the physician,
somewhat cheered even by his presence, and resolved to show
bravery if he did not feel it, and find out, if possible, what had
become of his lost love.
"Would he live?"
"Who would not?"
"What would he give for life and freedom?"
"Any thing."
"Then let him tell how he got clear from the many thongs that were
knotted around him."
"Remove the stones and I will show you."
"Is the Medicine a fool?"
"It is the only way I can explain, so that you will understand."
"The tongue of the pale-face is used to traveling a crooked trail, but
the snows of many winters have fallen upon the head of the
Medicine of the Sioux, and brought wisdom," and then, as a further
temptation to the revelation, he continued: "Would he not learn of the
squaw whose skin is like the blossom of the prairie rose?"
"I would be willing to die, if I could but know that she had escaped
from the power of that black-hearted ruffian."
"If I will tell, will you reveal the secrets by which you make yourself
great among your people?"
"Yes, any thing that is in my power."
"She fled in the night, and the pale-face can not find her."
"Heaven be thanked!"
"But neither can the red-man, though they have tracked her as the
starving wolf does the wounded and blood-dropping deer."
"Then she must be lost in the wilderness."
"Where the wild beasts roam," answered the red-man, with almost
fiendish delight.
It was a terrible consummation of the bright dream of love, and yet,
any thing was better than to think of her being the reluctant and
agonized wife of the remorseless renegade. Even death was a
release from never to be told suffering, and through the profound
darkness, there is a very faint hope of escape.
"Now," resumed the old trickster, "let the pale-face tell how he untied
himself."
"I can not without showing you."
"And how he made the voice that the red-man took for those of a
spirit?"
"It is a gift of nature, improved by practice," and he gave an
illustration of the peculiar powers of a ventriloquist.
"And how he made my arm like iron?"
"That, also, is a gift—the exercise of a concentrated will," and he
related the manner of mesmerism.
But do what he might he could not illuminate the stolid mind of the
Indian—could not produce any tangible illustrations, and
consequently could not satisfy him, and his face turned still blacker,
and became even more hideous with anger, as he thundered, "The
pale-face lies! He will make him tell what he wishes to know. Before
he has done with him, he will whine like a whipped dog—cry like a
sick pappoose, beg like a coward for his life, and be glad to tell every
thing that is concealed within his black heart."
Never was a poor wretch more at the mercy of his torturer. Besides
the bonds with which he had been fettered, and which cut deeply
into the flesh, his limbs were loaded down with heavy stones, so that
while they did not actually crush they yet restricted every movement.
Then, too, he was already beginning to suffer from the combined
effects of hunger and thirst.
"The pale-face handled and swallowed red-hot coals," said the
Medicine, savagely. "Let him keep the fire from burning him now if he
can!"
Slowly, and by the exercise of more strength than his withered frame
would have been thought to possess, the Indian removed the stones
from about his feet and kindled a fire there that would scorch, blister,
burn deeply and yet be in no danger of taking life. He was
experienced in this kind of torture, and knew well how far it could be
carried.
An icy sweat burst over the miserable prisoner—great drops stood
upon his brow. His agony was frightful. He could have screamed for
pain, and forced his tongue between his teeth to prevent his doing
so, though he could not keep the smoking flesh from wincing.
"Will the pale-face confess?" asked the diabolical old torturer, as he
held a cup of cold water to the parching lips, and then, as they were
strained open to swallow, swiftly removed it again.
"I have told you all I can," gasped the suffering man, adding beneath
his breath: "Oh! God, have mercy upon me!"
"It is a lie!"
The tortures were renewed—the fire drawn still a little closer, and to
make the horror more intense, the swollen, blistered feet were
scarified with the point of a sharp knife and the blood and water
spurted forth and hissed upon the glowing coals.
"Will the pale-face tell?"
"I can not—can not, more than I have already done."
He felt as if he would instantly expire. Yet his professional knowledge
told him such would not be the case—that human nature could
endure such suffering, severe though it was, for hours. And as the
old fiend bent over him, with looks of hatred and ferocity lighting up
his dark features, he registered the most solemn oath that ever was
formed within a human soul, that if he should survive and gain his
freedom he would rival him in revenge.
But when to the tortures of fire was added the equally terrible one of
water falling drop by drop upon his head, he felt that his agony was
fast becoming too great for endurance—every fiber of his frame
shuddered, and he knew that he was rapidly becoming insane.
Then he would have bartered every particle of knowledge he
possessed for a respite from pain, no matter how brief, and did all
that was in his power to tell his tormentor what he was so anxious to
know. But it was without avail. The fire still raged, and blistered, and
burned—the skin was beginning to crumble away, shriveling up like
parchment and gaping cracks appearing in the flesh!
Even the Medicine saw that it would not do to carry it further, and
kicking aside the brands he drew some ointment from his pouch,
dressed the horribly-burned feet, and with the very refinement of
cruelty, said:
"To-morrow all the fire will be removed, and the sores begin to heal,
for this salve is famous among the red-men. Then I will come and
burn again!"
The poor white man fancied, and a prayer of thankfulness went
upward from his heart at the thought, that his torture for the time was
ended. But it was not so. It was to be continued in a different manner
—one equally difficult to bear, though bringing with it little danger.
Tearing the garments from about his body and as far as he could
well do from his limbs, the demon in human shape produced a bag
of nettles and began rubbing the exposed flesh, leaving such a
fierce, fiery, stinging sensation that even more than fire tended to
drive the victim mad.
"Ho! ho!" shouted the Medicine, making the cavern echo with his
derisive and joyous laughter. "How do you like this? Where are the
spirits now that you boasted you could summon at your pleasure?
Why do they not come and save you?"
"'Taunt as you may!" replied the prisoner, choking down the great
gasps of pain, "but your day will come, and then, God help you!"
"The Manitou of the pale-face is a dog."
There were other and equally bitter tortures floating through the mind
of the Medicine, but he was forced to reserve them until another
occasion. His pleasure in the suffering of the helpless prisoner was
too great to be glutted at once, and so he gave him both food and
drink to refresh and sustain him. Besides he believed he would yet
accomplish his purpose of extorting the secrets he desired, and
would prolong human suffering to any extent to do so.
Again the prisoner was left alone and in the darkness, suffering,
almost dying, and even when worn out and he slumbered, his
sufferings could only have been equaled by those of the bottomless
pit.
CHAPTER XI.
THE RENEGADE.
With the peculiar cunning that belongs to such dastardly-minded
men, George Parsons watched for some sign of the beautiful Olive,
but without success. He could neither find a token or a trace. That
she was hidden somewhere in the neighborhood he did not doubt
any more than that she had been spirited away by some of the
Indians who were jealous of him. But, failing to ascertain any thing,
he resolved upon blinding the eyes of the Indians for a time; so
proclaiming his wish to settle among them and become a chief, he
boldly began wooing a young squaw for his bride, little thinking that
the one whom he had so brutally intended to destroy was keeping an
eye upon his movements and silently nursing her revenge.
Yet such was the case. The Burning Cloud had persistently avoided
him, or when forced to be seen by him, had been so effectually
muffled and disguised that he did not recognize her. In fact he had
almost forgotten the episode of their meeting amid the other
excitements, and not having seen her was led to believe that she did
not belong to that portion of the tribe, and soon gave the matter no
further thought.
But she never failed to keep track of all his movements, and as soon
as she learned that he was endeavoring to gain the affections of one
(who chanced to be a friend and an intimate) of their number, she
resolved to ascertain what his intentions really were, for, with a
woman's penetration she saw that something was hidden.
First, however, she must take the girl whom he destined to make his
wife into her confidence, and obtain from her a pledge of secrecy, as
well as to put her upon her guard against a love that could only
prove disastrous. This was not difficult. Indian girls love mystery as
well as their fairer-skinned sisters, and it was so arranged that the
Burning Cloud became an unseen witness of many of their
interviews.
The girl played her part well. It was subtle treachery against
treachery. She led him on by the arts well known to all women—by a
skillful management of sighs and voice and eyes, until he plainly told
her of his love, and urged her to consent to immediately become his
wife. Then she played the coquette—refused him even a kiss, but,
after long pleading, promised to meet him the next evening, when no
one could see or hear them, and give him an answer.
The delay chafed, but he was forced to be satisfied, and when the
appointed time came, he found the young squaw waiting for him at
the trysting, though the spot she had chosen was so dark that he
knew not of her presence until she called him by a name given by
the tribe—and a very appropriate one it was.
"The eyes of White Wolf are not sharp," she said, with a low laugh at
the manner in which he started, "and his heart beats not warm or it
would have told him who was near."
"Why, Little Raven," he replied, "it is so dark that I could not see any
thing—so dark that I was afraid you would not dare to come."
"What should she fear? Her heart is pure and her trail an open one.
She is willing the Great Spirit should see both—should know her
every thought."
"Why do you speak so low, and in a changed voice?"
"There is more than one of the braves jealous of White Wolf, and
until Little Raven becomes his wife and has found a home in his
wigwam, she would not have any one know of their meeting."
"That is well enough. But, come nearer to me. Let me put my arm
around you, and give me a kiss."
"Is it thus the white squaws treat their lovers?"
"Certainly."
"The red one keeps her favors for her husband," was the proud
response. "He would have the flower before the dew is brushed from
it, or not at all."
"That's prudish, Raven. But who is there to see?"
"The stars and the Manitou."
"Pshaw! Your coming to-night tells me that you will be my wife, and
why should there any longer be formality between us?"
"Does not the pale-face bring gifts to the wigwam of her he loves?"
"Yes, and you shall have them in plenty after we are married. Then I
am going back to my people for a little time, and when I come again
you shall have beads and ribbons and every thing you desire."
"Why does he go if he wishes to become a chieftain of the Sioux?"
"To get guns and powder."
"But what will he say when they ask him what has become of the
pale squaw who was in his company?" she asked, gently leading
him on.
"I don't know; shall have to tell some kind of a story. What do you
think has become of her, Little Raven?" and the tone of his voice told
her sensitive ear that he was very far from having lost his interest in
her.
"The pale-face has hidden her, and will bring her back, when he
wills, to his wigwam."
"What, when you are to be my wife?"
"Are the chiefs of the pale-faces so poor that they can not have but
one wife? The red warrior has many."
"I hadn't thought of that, but the fact is I don't know where she is,
though I have searched far and near, and intend to continue to do
so."
"Then you do love her?"
"No; I hate her, and would soon hand her over to the tribe for torture.
If you will find her, Raven, I will give you any thing you ask."
"If I should, I would drive a knife through her heart."
"What in the name of heaven would you do that for?" he asked,
earnestly, and with far more of feeling than he intended to display.
"So that she could not come between me and the love of White
Wolf."
"That would never do. She must not be injured, even in a hair of her
head."
She had found out all she desired to know of the state of his heart—
knew just as plainly as if he had told her that he still coveted the
lovely white girl, and changing the subject, asked:
"Will the pale-face take the Raven, after he has made her his wife,
with him when he goes to visit his people?"
"That I couldn't do."
"And he will soon come back?"
"Very soon. I may not be gone over a week."
"Will he tell the warriors of his plans?"
"No, why should he?"
"They are to be his brothers."
"Does each tell the other when he starts upon a hunting-trail or for
scalps?"
"When there is any great purpose, yes."
"Well, I don't choose to do so. But, Raven, I want you to keep a
sharp look-out for the white girl while I am gone. Will you do so?"
"The eyes and ears of the Little Raven will be open."
"And you need not say what I have gone for to any one. I shall give
out that it is to hunt; that will be enough."
"When will White Wolf start?"
"I don't know. When will you marry me?"
"When you come back, ask me."
"Why not answer it now?"
"Because he might never return, and then the girls of the tribe would
point their fingers at her and cry out shame!"
"I am certain to come back," and had he finished the sentence as it
was in his thoughts it would have been with, "for vengeance upon
your cursed race who have robbed me of Olive."
"If so soon, he can wait until then for the Little Raven to fill his
wigwam, and he can bring presents to make her gay for her bridal."
That he did not wish the bride to know of his intentions was proof
positive to her mind of treachery, and though the conversation drifted
into love matters and he protested it in the most ardent fashion, yet
she kept him at a distance and would not permit him to enjoy
caresses in the slightest degree. But she managed to convince him
(though without pledging herself) that she adored him more than all
the world—would keep his secrets and be true to him in all respects,
and when they separated he believed her heart to be all his own.
There would, however, have been a great revulsion in his feelings if
he could have seen how she doubled like a hare upon her trail as
soon as his back was turned, and entered the village by another path
—how she flung aside her blanket and the face that was revealed
was stamped with any thing but tender emotions—was that of the
Burning Cloud!
But he met the Little Raven soon afterward, and they had a long and
familiar conversation (though without referring to what had already
transpired that night), and she managed to deepen still more the
impression he had received, and he felt that he was playing the part
of a scoundrel. But, the heart of woman was nothing more than a
straw, and he cared as little about breaking it.
With all his arrangements perfected, he took his rifle upon the
following morning and started out as if for a brief hunt, passing the
Little Raven, pausing and bidding her a kind farewell. But he also
passed another who knew far more, and whom he did not see.
Burning Cloud was peeping at him through the curtains of her
wigwam, and as soon as he had disappeared turned to her brother—
a young warrior of very noble face and figure, and whispered:
"Follow him as the wolf follows the wounded buffalo, as the eagle
does the dove—the panther the young doe. Be ever near him and
yet never in sight. Hear every word that issues from his lips but let
yours be dumb as death. Be secret as the mole and crafty as the
spider. Let your footsteps be as light as the falling snowflake, and
your ear as sharp as the stag. Let nothing escape you. More than
you dream of hangs upon what you may learn—perhaps even the
fate of the whole tribe. If he turns back, bring me the news before he
can get half the way. Let nothing stop you, fire or tempest, heat or
cold, sunshine or rain, hunger, thirst, sleep, rest, thunder or lightning.
But should he not come back," and her eyes flashed still more vividly
and her frame trembled with wild excitement, "should he attempt to
fly like a loon-hearted coward, this!" and she handed him a long knife
that had been ground to razor-like sharpness, "and bring back his
scalp or come not at all."
"My ears are like the soft earth in the springtime to receive, and like it
when frozen in the winter to retain," he said, and slowly disappeared
from the village, as active, crafty and well-prepared a spy as ever
followed trail for knowledge or for blood!
For two days and two nights he tracked the white man. Then the trail
of the emigrants was reached, and he easily divined that the object
of the renegade was to intercept some passing train, and fortune
favored him. He saw one toiling along in the distance, knew where it
would camp, reached the spot ahead of them, and when Parsons
came up was hidden so as to watch all that happened—watch and
listen.
Free tongue was given to the conversation, and the spy heard it all.
Then, and without waiting for the light, he turned homeward, and
scarcely a deer could have traveled more swiftly—traveled without
the slightest pause for rest—burst, travel-stained, into the wigwam of
his sister even while she was sleeping, and the single word he
uttered was the condensation of all he had to tell. It was:
"Naudoway—see!"
CHAPTER XII.
IN THE FOREST.
The sudden fainting and falling of the wretched night-wandering
Olive saved her life.
The panther had been startled by her shrill screams, miscalculated
the distance, leaped over her and was instantly engaged in deadly
warfare with another of its kind, that had also come upon the same
errand—was stealing along like a grim ghost through the bushes,
and was hurled to the earth by the one that leaped from the tree.
But the poor girl fortunately knew nothing of the savage duel—heard
nothing of the snarling, tearing, ripping—the snapping of jaws—the
rending of claws—the terrible howls. All that was spared her, and
when she awoke to something of consciousness she crawled in an
opposite direction, though wondering very much as she paused to
rest in the sunshine, that streamed through the tree-tops, how her
dress should have become so spotted with blood—which she
believed came from human veins.
Refreshing herself from a cool spring that trickled out from the mossy
interstices of a rock, she endeavored to think of what it was best to
do. Of her exact locality she had no conception, but after an hour of
reflection she believed she knew the course to the valley, where her
lover had been walled in, and following the dictation of her heart,
womanlike, rather than her reason, she determined upon the
desperate task of finding and releasing him.
But how difficult the undertaking she was soon convinced—difficult
and dangerous. More than once she fled in alarm from a rustling in
the bushes—once she stood almost face to face with a great, gaunt
timber-wolf—once she trod upon a shining, scaly serpent, whose
horrid hissings rung in her ears for hours afterward, making her very
flesh creep.
It was a terribly long, tedious, laborious, foodless day, and when
night gathered around she sought and found a large hollow tree,
gathered branches, crept within, barricaded it, and, with a fervent
prayer to Heaven, was soon lost in the deepest slumber of all her
young lifetime.
Yet even blessed rest was denied her. Scarcely an hour had passed
before she was awakened by something scratching without, and saw
two red eyes peering in at her that flashed angry lightnings, while a
deep roar told of some wild beast. Then she intuitively knew all that
was to come—knew how much she was at the mercy of some
savage monster!
She had taken up her quarters in the home of one of the huge bears
of the mountains, and it was returning to its cubs!
Guided far more by impulse than reason, she grasped one of the
largest of the branches and struck the hideous beast in the face, and
then, as it drew back in astonishment, she sprung forth screaming, to
the full extent of her lungs—sprung forth and ran swiftly away, the
bear following, and it would very soon have torn her limb from limb
had not the plaintive cries of its cubs recalled it, and with nature
triumphing over passion it returned to the tree, giving her an
opportunity to escape.
What should she do? She dared neither to stand still or go on—had
lost all her reckoning—knew not in what direction she was going—
was fainting from hunger—was powerless to protect herself. But with
constant prayer for him she loved as well as her own safety she
continued to wander, momentarily expecting to be confronted by
some of the monsters of the forest. And so utterly hopeless became
her state that she would have gladly gone back to the wigwams of
the Indians, foolishly believing that her condition would excite their
pity, had she known the way—have gone like a bleeding lamb into
the den of wolves.
Slower became her journeying—fainter was her breath drawn. She
could scarcely draw one poor bruised foot after the other, and it was
evident even to her reeling senses that her end was very near—that
she would soon have to perish in the wilderness—die alone without
a single soul to pity, or kindly hand to close her eyes, and that her
body would become the sport of wolves' whelps and foul carrion
birds.
The idea was too horrible to be calmly endured, and a great cry of
misery escaped from her fevered lips. She reeled against a tree,
grasped it within her arms, and stood motionless as if turned into
stone. The greatest horror of her existence had burst suddenly upon
her. She saw by the dim light of the early morning that an Indian was
coming toward her—knew that he had heard her screaming—knew
that it was her fearful enemy, Muck-a-kee!
In an instant he was by her side and his heavy hand was laid upon
her shoulder, and his harsh voice hissed into her trembling ears:
"So the pale-face thought to escape and has nearly perished in the
wilderness? But she will wander no more. The wings of the dove
shall be clipped so that she can not fly, and the limbs of the doe
fettered so that she can not run."
"Merciful God, protect me," was all that she could gasp, as she was
hurried along with more than brutal rapidity.
"The red-man has been constantly upon her trail," he continued,
"since she escaped from the wigwam of old Metiz. He has followed
her fast and far. Now she shall never leave his side again. Where he
goes she shall go and he will make her obey."
"Where, oh, where are you going to take me?"
"Far away from even the village of his tribe. There he will keep her
until her proud spirit is broken. He will tame her by hunger and thirst,
and heavy loads, and the whip, and—"
"Oh, misery!"
"It is the song she will sing until death!"
Striking in a directly opposite direction to that of the encampment of
the tribe, he soon emerged from the timber, and much to her
comfort, even if not joy, she was lifted upon a horse and carried
along until near noon. Then a swift-winged bullet suddenly put a stop
to their course. It had pierced the skull of the horse, and he reared
and fell backward, carrying his riders to the ground with him, and, as
it appeared, crushing the Indian under him and hurling the girl to
some distance, where she lay crippled, even if not dead.
Then the renegade Parsons issued from the woods, cautiously
approached and crept around to obtain a better view before
venturing nearer. But at length he became convinced that the Indian
was powerless to do harm.
But, true to his training, the chief had counterfeited death to draw the
white man to him, for, save his knife and hatchet, he was
weaponless; and the instant the white man came within reach he
sprung up and upon him with a yell of delight.
But, if a traitor and black-hearted villain, George Parsons was a good
fighter when the test came—was muscular and desperate. He met
the red warrior without flinching, and though the heavy buck-skin
garments he wore protected him very much, while his antagonist
was naked, save the shaggy bear-skin about his loins, yet the battle
would have been a long one and doubtful had not his foot caught in
a hole in the prairie, causing him to lose his balance and be thrown
heavily.
Hurled backward upon the ground, the white man was at the mercy
of one who never knew of such a thing, even in name, and who had
many motives besides life and gaining the scalp of his enemy for
winning the battle.
Quick as thought the Indian was upon the renegade, kneeling upon
his arms and rendering them useless, while he felt of the point of his
knife with a smile, and then ran his fingers along the ribs to make
certain of the locality of the heart. But yet he hesitated to strike, and
his face wore the look of the serpent when the bird is completely
within its power, and it has only to dart out its forked tongue to bring
death.
"Will the pale dog beg for his life?" he asked.
"Never!" was the reply of Parsons, knowing how useless it would be
to do so.
"Then he will die!" hissed the Indian, "and with his bleeding scalp
Muck-a-kee will deck the squaw of his race as he carries her away to
be his wife."
"Devil!"
"The pale-face was a fool to think the girl would be his. She was
destined from the first for the wigwam of the warrior."
"Oh! had I but known this!"
"It is too late, and he had better sing his death-song."
"Ha! ha! There comes a party of white men and the girl is rushing
toward them."
For a single instant the red warrior forgot his cunning. He turned his
head and somewhat loosened his hold. Parsons took advantage of it
—wormed himself from under and sprung again to his feet. Never
was the tide of battle more suddenly changed—never one renewed
with more intense fury or more gallantly contested even though in a
bad cause.
The knife of the Indian struck upon the hatchet of the white man and
was shivered to the hilt. He flung the remnant aside with a curse
upon the Manitou, and felt for his tomahawk. In the desperate
struggle it had been loosened and fallen to the ground, and he was
weaponless. With the cry of an enraged beast he closed with his
antagonist, fastened his great teeth in his throat and hung on with
the tenacity of a bull-dog. But it was his very last battle—his very last
struggle.
Once—twice, the long knife of the white man was driven to his
breast and twisted around with devilish malice. Then the set jaws
relaxed—the eyes turned in their sockets, and the powerful chief of
the Sioux fell backward to the earth, dead, and without a groan.
Smarting from pain—half-strangled—with the marks of teeth in his
throat that he would carry to the grave, Parsons was forced to rest
and take care of himself before he could even give a thought to the
prize he had battled so desperately and nearly fatally for. But he
hastened to tear away a portion of his garments, and having
stanched the blood, crawled to where she was lying.
She saw him coming and attempted to fly—ran a little distance into
the wood and then fell exhausted. Nature had already been too
much overtaxed for her to endure more, and unless she could have
rest and care, death would certainly follow and that at no great
distance.
On gaining possession of Olive, the renegade would have instantly
returned and joined his new-made friends the emigrants. But neither
the captive nor himself was in a condition to do so and he was forced
to remain. Yet scarcely had he fixed a place for a temporary
encampment before there appeared before his startled eyes the
Indian girl—Little Raven!
"The pale chief has found the squaw with the soft hair and skin like
snow," she said, "and is taking her back to the wigwams of the red-
man?"
"Yes—yes," he stammered, not daring to deny it.
"He has met a bear in the woods?" she asserted rather than asked.
"Yes," and he willingly enlarged upon the story that would save him
from telling the truth.
"The Little Raven will dress his wounds," and having procured soft
bark and gum she did so with exceeding skill.
"How came you here?" he asked.
"She was coming to meet her lover. Her heart longed for him as the
deer for the salt-lick."
"For the love of heaven," exclaimed Olive, "save me from this brutal
man. He has killed—"
"If the maiden of the white skin would live she must keep her tongue
between her teeth," hissed the Indian girl, with a scowling face and
half-drawing her knife.
"You are right, Raven," responded the renegade. "She must not
speak, for she would utter nothing but lies."
"Has the pale chief visited his people and brought her present?"
again questioned Little Raven.
"No. He found this girl and was hastening back to give her up to the
tribe."
"And make Raven his wife?"
"Yes."
"Has he seen any thing of Muck-a-kee?"
"No."
"He is telling what is not true," interrupted Olive, "for he killed—"
"Let the pale squaw come again between the Raven and her lover
and I will tear out her tongue!" and the knife of the squaw flashed so
near her face that Olive shrunk back, covered her face with her
hands and remained silent.
But when the squaw had gathered branches and made a shelter for
Parsons and one at some distance for the white girl—when she had
built a fire, cooked a little venison she had brought with her—had fed
both—had steeped some roots and herbs and given the renegade to
drink, she came and sat by her female companion with her drawn
knife in her hand. Then once more Olive ventured to speak and ask:
"Will you not tell me what is to be done with me?"
"I will kill you as I would the rattlesnake that tried to bite me if you
attempt to escape!" was the stern answer.
Another silence of an hour passed. Then the Little Raven arose and
noiselessly sought the side of her pretended lover. She bent down so
that her face almost touched his and listened long and earnestly, and
having satisfied herself that his slumber was no counterfeit one, she
returned to Olive, laid down beside her, and whispered:
"Now the pale squaw may talk. The ears of the chief are like those of
the deaf adder. Little Raven is her friend. Let her tell all that has
happened since she left the wigwams of the red-men."
"I thought you loved that man," replied Olive.
"I hate him, but he must not know it. Let the pale squaw open her
heart, and it will be well for her," and she drew her companion to her
and left a reassuring kiss upon her lips.
Then the poor prisoner did indeed open her heart and told all. The
girl dashed out into the prairie and assured herself that the death of
Muck-a-kee was no fable, and was consequently easily convinced of
the truth of the rest, and after a little, persuaded Olive to sleep.
"The sun will again be high," she said, "before the eyes of the pale
chief are open. The drink that Little Raven gave him will hold him
next to death."
"And you will protect me?"
"With my life. But it will not be needed. Let her sleep."
The squaw released her from her warm embrace—drew her blanket
over her head, and remained motionless for a long time. Then she
cautiously arose, disappeared, and in an hour after was in the
wigwam of the Burning Cloud.
CHAPTER XIII.
THE SCOUT.
With the dawn of light the scout was astir, and began carefully
investigating the ground. But he had gone over very little of it when
he saw the old Medicine come sauntering along and enter his cave,
that was so well guarded by beasts and reptiles. He watched until
the old man came out again, trailed him as he visited the walled up
spot where the physician was confined, and waited until he returned
to the village, and then crawled near and gave vent to his thoughts
after his own peculiar manner:
"Here am ernother of ther old devil's dens and I don't like ther looks
on it nuther. But I must know all of his run-ways and what he am
erbout. Besides, no one must know that I am eround and it may
come handy ef I should have ter cut fer my life."
It was a wise though a dangerous resolution, and had not a party of
hunters stopped directly in front of it to cook game, the suffering
prisoner would have been immediately rescued. That prevented, but
still he lingered near—crawled to the rocks above and watched them
closely. It was at too great a distance, however, for him to hear what
was being said, and curiosity drew him nearer. But he soon had
occasion to regret it, for venturing upon the very verge of the cliff it
crumbled beneath his weight and he rolled down like a great ball into
their very midst!
The startled Indians fled in every direction, satisfied that it was the
ghost of the man they had seen swinging from the tree above, and,

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