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Brief Contents
Part 1 Introduction and Key Principles 11 The Income-Expenditure Model 218

1 Introduction: What Is Economics? 1 12 Investment and Financial Markets 249

2 The Key Principles of Economics 26 Part 5 Money, Banking, and Monetary Policy
3 Exchange and Markets 45
13 Money and the Banking System 268
4 Demand, Supply, and Market
­Equilibrium 60 14 The Federal Reserve and Monetary
Policy 288
Part 2 The Basic Concepts in Macroeconomics
Part 6 Inflation, Unemployment, and Economic
5 Measuring a Nation’s Production Policy
and Income 89
15 Modern Macroeconomics: From the
6 Unemployment and Inflation 112 Short Run to the Long Run 307

Part 3 The Economy in the Long Run 16 The Dynamics of Inflation and
Unemployment 325
7 The Economy at Full Employment 132 17 Macroeconomic Policy Debates 344
8 Why Do Economies Grow? 152
Part 7 The International Economy
Part 4 Economic Fluctuations and Fiscal Policy
18 International Trade and Public
9 Aggregate Demand and Aggregate Policy 360
Supply 180
19 The World of International
10 Fiscal Policy 200 Finance 380

vii
This page intentionally left blank
Contents
Preface xix Using Macroeconomics to Make Informed
Business Decisions 11

Part 1 Preview of Coming Attractions:

Introduction and Key Principles Microeconomics 11
Using Microeconomics to Understand Markets
and Predict Changes 11
1 Introduction: What Is Economics? 1
Using Microeconomics to Make Personal and
What Is Economics? 2 Managerial Decisions 11

Positive versus Normative Analysis 3 Using Microeconomics to Evaluate Public

Policies 12
The Three Key Economic Questions: What, How,
* Summary 12 * Key Terms 12
and Who? 4
* Exercises 13
Economic Models 4
Appendix: Using Graphs and Percentages 14
Economic Analysis and Modern Problems 5 Using Graphs 14

Economic View of Traffic Congestion 5 Computing Percentage Changes and Using

Equations 22
Economic View of Poverty in Africa 5
Application 3 The Perils of Percentages 23
Economic View of the Current World Recession 6

The Economic Way of Thinking 6 2 The Key Principles of

Use Assumptions to Simplify 7 Economics 26
Isolate Variables—Ceteris Paribus 7
The Principle of Opportunity Cost 27
Think at the Margin 7
The Cost of College 27
Rational People Respond to Incentives 8
The Cost of Military Spending 28
Application 1 Incentives to Buy Hybrid Vehicles 8 Opportunity Cost and the Production Possibilities
Example: London Addresses Its Congestion Curve 28
Problem 9
Application 1 Don’t Forget the Costs of Time
Application 2 Housing Prices in Cuba 9 and Invested Funds 30

Preview of Coming Attractions: The Marginal Principle 31

Macroeconomics 10 How Many Movie Sequels? 31
Using Macroeconomics to Understand Why Renting College Facilities 32
Economies Grow 10
Automobile Emissions Standards 33
Using Macroeconomics to Understand Economic
Fluctuations 10 Driving Speed and Safety 33

ix
x

Application 2 How Fast to Sail? 34 Market Failure and the Role of Government 54

The Principle of Voluntary Exchange 34 Government Enforces the Rules of Exchange 54

Exchange and Markets 34 Government Can Reduce Economic

Uncertainty 55
Online Games and Market Exchange 35
Application 3 Property Rights and Urban
Application 3 Rory McIlroy and Weed- Slums 56
Wacking 35
* Summary 56 * Key Terms 56
The Principle of Diminishing Returns 36 * Exercises 57

Application 4 Fertilizer and Crop Yields 37

4 Demand, Supply, and Market
The Real-Nominal Principle 37
Equilibrium 60
The Design of Public Programs 38

The Value of the Minimum Wage 38

The Demand Curve 61
The Individual Demand Curve and the Law
Application 5 Repaying Student Loans 39 of Demand 61
* Summary 39 * Key Terms 40 From Individual Demand to Market Demand 63
* Exercises 40
Application 1 The Law of Demand for Young
* Economic Experiment  44
Smokers 64

The Supply Curve 64

3 Exchange and Markets 45
The Individual Supply Curve and the Law
of Supply 65
Comparative Advantage and Exchange 46
Why Is the Individual Supply Curve Positively
Specialization and the Gains from Trade 46
Sloped? 66
Comparative Advantage versus Absolute
From Individual Supply to Market Supply 67
Advantage 48
Why Is the Market Supply Curve Positively
The Division of Labor and Exchange 48
Sloped? 68
Comparative Advantage and International
Trade 49 Application 2 Law of Supply and Woolympics 69

Outsourcing 49 Market Equilibrium: Bringing Demand

and Supply Together 69
Application 1 Absolute Disadvantage
and Comparative Advantage in Latvia 50 Excess Demand Causes the Price to Rise 69

Markets 51 Excess Supply Causes the Price to Drop 70

Virtues of Markets 51 Application 3 Shrinking Wine Lakes 71

The Role of Entrepreneurs 52 Market Effects of Changes in Demand 71

Example of the Emergence of Markets: POW Change in Quantity Demanded versus Change in
Camps 53 Demand 71

Application 2 The Market for Meteorites 53 Increases in Demand Shift the Demand Curve 72

Decreases in Demand Shift the Demand Curve 74
A Decrease in Demand Decreases the Equilibrium
Price 75
Application 4 Chinese Demand and Pecan
Prices 75
Market Effects of Changes in Supply 76
Change in Quantity Supplied versus Change in
Supply 76
Increases in Supply Shift the Supply Curve 76
An Increase in Supply Decreases the Equilibrium
Price 78
Decreases in Supply Shift the Supply Curve 79
A Decrease in Supply Increases the Equilibrium
Price 79
Simultaneous Changes in Demand and Supply 80
Application 5 The Harmattan and the Price
of Chocolate 82
Predicting and Explaining Market Changes 82
Application 6 Why Lower Drug Prices? 83
* Summary 83 * Key Terms 84
* Exercises 84
* Economic Experiment  88
6 Unemployment and Inflation 112
Part 2
The Basic Concepts in Macroeconomics
5 Measuring a Nation’s Production
and Income 89
The “Flip” Sides of Macroeconomic Activity:
Production and Income 90
The Circular Flow of Production and Income 91
Application 1 Using Value Added to Measure the
True Size of Walmart 92
The Production Approach: Measuring a
Nation’s Macroeconomic Activity Using
Gross Domestic Product 92
xi
The Components of GDP 94
Putting It All Together: The GDP Equation 97
Application 2 Comparing Recoveries From
Recessions 98
The Income Approach: Measuring a Nation’s
Macroeconomic Activity Using National
Income 98
Measuring National Income 98
Measuring National Income through Value
Added 99
An Expanded Circular Flow 100
Application 3 The Links Between Self-Reported
Happiness and GDP 101
A Closer Examination of Nominal and Real
GDP 101
Measuring Real versus Nominal GDP 102
How to Use the GDP Def lator 103
Fluctuations in GDP 104
GDP as a Measure of Welfare 106
Shortcomings of GDP as a Measure of Welfare 106
* Summary 107 * Key Terms 108
* Exercises 108
Examining Unemployment 113
How Is Unemployment Defined and
Measured? 113
Alternative Measures of Unemployment and Why
They Are Important 115
Who Are the Unemployed? 116
Application 1 Declining Labor Force
Participation 117
Categories of Unemployment 118
Types of Unemployment: Cyclical, Frictional,
and Structural 118
The Natural Rate of Unemployment 119
xii
Application 2 Less Unemployment Insurance,
More Employment? 120
The Costs of Unemployment 120
Application 3 Social Norms, Unemployment,
And Perceived Happiness 121
The Consumer Price Index and the Cost
of Living 122
The CPI versus the Chain Index for GDP 123
Application 4 The Introduction of Cell Phones
and the Bias in the Cpi 124
Problems in Measuring Changes in Prices 124
Inflation 124
Historical U.S. Inf lation Rates 125
The Perils of Def lation 126
The Costs of Inflation 127
Anticipated Inf lation 127
Unanticipated Inf lation 127
8 Why Do Economies Grow? 152
* Summary 128 * Key Terms 129
* Exercises 129
Part 3
The Economy in the Long Run
7 The Economy at Full
Employment 132
Wage and Price Flexibility and Full
Employment 133
The Production Function 133
Wages and the Demand and Supply for
Labor 136
Labor Market Equilibrium 137
Changes in Demand and Supply 137
Application 1 The Black Death and Living
Standards in Old England 138
Labor Market Equilibrium and Full
Employment 139
Using the Full-Employment Model 140
Taxes and Potential Output 140
Real Business Cycle Theory 141
Application 2 Do European Soccer Stars Change
Clubs to Reduce Their Taxes? 143
Application 3 Government Policies and Savings
Rates 144
Dividing Output among Competing Demands
for GDP at Full Employment 144
International Comparisons 145
Crowding Out in a Closed Economy 145
Crowding Out in an Open Economy 147
Crowding In 147
* Summary 148 * Key Terms 148
* Exercises 148
Economic Growth Rates 153
Measuring Economic Growth 154
Comparing the Growth Rates of Various
Countries 155
Are Poor Countries Catching Up? 156
Application 1 Global Warming, Rich Countries,
and Poor Countries 157
Application 2 Behavioral Incentives in
Development 158
Capital Deepening 158
Saving and Investment 159
How Do Population Growth, Government,
and Trade Affect Capital Deepening? 160
The Key Role of Technological Progress 162
How Do We Measure Technological Progress? 162
Using Growth Accounting 163

Application 3 Sources of Growth in China and
India 164
Application 4 The End of Growth? 165
What Causes Technological Progress? 165
Research and Development Funding 165
Monopolies That Spur Innovation 166
The Scale of the Market 166
Induced Innovations 167
Education, Human Capital, and the Accumulation
of Knowledge 167
New Growth Theory 168
Application 5 The Role of Political Factors in
Economic Growth 168
Application 6 Culture, Evolution, and Economic
Growth 169
A Key Governmental Role: Providing
the Correct Incentives and Property
Rights 169
Application 7 Lack of Property Rights Hinders
Growth In Peru 170
* Summary 171 * Key Terms 171
* Exercises 172
10
Appendix: A Model of Capital Deepening 175
Part 4
Economic Fluctuations and Fiscal Policy
9 Aggregate Demand and Aggregate
Supply 180
Sticky Prices and Their Macroeconomic
Consequences 181
Flexible and Sticky Prices 181
How Demand Determines Output in the Short
Run 182
Application 1 Measuring Price Stickiness in
Consumer Markets 183
xiii
Understanding Aggregate Demand 183
What Is the Aggregate Demand Curve? 183
The Components of Aggregate Demand 184
Why the Aggregate Demand Curve Slopes
Downward 184
Shifts in the Aggregate Demand Curve 185
How the Multiplier Makes the Shift Bigger 186
Application 2 Two Approaches to Determining the
Causes of Recessions 190
Understanding Aggregate Supply 190
The Long-Run Aggregate Supply Curve 190
The Short-Run Aggregate Supply Curve 192
Supply Shocks 193
Application 3 Oil Price Declines and the U.S.
Economy 194
From the Short Run to the Long Run 195
* Summary 197 * Key Terms 197
* Exercises 197
Fiscal Policy 200
The Role of Fiscal Policy 201
Fiscal Policy and Aggregate Demand 201
The Fiscal Multiplier 202
The Limits to Stabilization Policy 203
Application 1 Increasing Life Expectancy and
Aging Populations Spur Costs of Entitlement
Programs 205
The Federal Budget 206
Federal Spending 206
Federal Revenues 207
The Federal Deficit and Fiscal Policy 209
Automatic Stabilizers 209
Are Deficits Bad? 210
xiv
Application 2 The Confucius Curve? 211
Fiscal Policy in U.S. History 211
The Depression Era 211
The Kennedy Administration 211
The Vietnam War Era 212
The Reagan Administration 213
The Clinton and George W. Bush
Administrations 213
Application 3 How Effective was the 2009
Stimulus? 214
* Summary 215 * Key Terms 216
* Exercises 216
12
11 The Income-Expenditure Model 218
A Simple Income-Expenditure Model 219
Equilibrium Output 219
Adjusting to Equilibrium Output 220
The Consumption Function 222
Consumer Spending and Income 222
Changes in the Consumption Function 223
Application 1 Falling Home Prices, the Wealth
Effect, and Decreased Consumer Spending 224
Equilibrium Output and the Consumption
Function 225
Saving and Investment 226
Understanding the Multiplier 227
Application 2 Multipliers in Good Times and
Bad 229
Government Spending and Taxation 229
Fiscal Multipliers 229
Using Fiscal Multipliers 231
Understanding Automatic Stabilizers 233
Application 3 The Broken Window Fallacy
and Keynesian Economics 234
Exports and Imports 236
Application 4 The Locomotive Effect: How Foreign
Demand Affects a Country’s Output 238
The Income-Expenditure Model and the
Aggregate Demand Curve 239
* Summary 241 * Key Terms 241
* Exercises 241
* Economic Experiment  244
Appendix: Formulas for Equilibrium Income and the
Multiplier 245
Investment and Financial
Markets 249
An Investment: A Plunge into the
Unknown 250
Application 1 Energy Price Uncertainty Reduces
Investment Spending 251
Evaluating the Future 252
Understanding Present Value 252
Real and Nominal Interest Rates 254
Application 2 The Value of an Annuity 255
Understanding Investment Decisions 256
Investment and the Stock Market 257
Application 3 Underwater Homeowners and Debt
Forgiveness 259
How Financial Intermediaries Facilitate
Investment 259
When Financial Intermediaries
Malfunction 262
Application 4 Securitization: The Good, The Bad,
and The Ugly 263
* Summary 264 * Key Terms 264|
* Exercises 265
* Economic Experiment  266

Part 5
Money, Banking, and Monetary Policy
13 Money and the Banking System 268
What Is Money? 269
Three Properties of Money 269
Measuring Money in the U.S. Economy 271
Application 1 Cash as a Sign of Trust 272
How Banks Create Money 273
A Bank’s Balance Sheet: Where the Money Comes
from and Where It Goes 273
How Banks Create Money 274
How the Money Multiplier Works 274
How the Money Multiplier Works in Reverse 276
Application 2 The Growth In Excess Reserves 277
A Banker’s Bank: The Federal Reserve 278
Functions of the Federal Reserve 278
The Structure of the Federal Reserve 278
The Independence of the Federal Reserve 280
What the Federal Reserve Does during a
Financial Crisis 280
Application 3 Stress Tests for the Financial
System 281
Application 4 Coping with the Financial Chaos
Caused by the Mortgage Crisis 281
* Summary 282 * Key Terms 283
* Exercises 283
* Economic Experiment  285
15
Appendix: Formula For Deposit Creation 287
14 The Federal Reserve and Monetary
Policy 288
The Money Market 289
The Demand for Money 289
xv
Application 1 Quantitative Easing and the Fed’s
Balance Sheet 291
How the Federal Reserve Can Change the
Money Supply 292
Open Market Operations 292
Other Tools of the Fed 293
Application 2 Did Fed Policy Cause the
Commodity Boom? 294
How Interest Rates Are Determined: Combining
the Demand and Supply of Money 295
Interest Rates and Bond Prices 296
Application 3 The Effectiveness of
Committees 298
Interest Rates and How They Change
Investment and Output (GDP) 298
Monetary Policy and International Trade 300
Monetary Policy Challenges for the Fed 302
Lags in Monetary Policy 302
Inf luencing Market Expectations: From the
Federal Funds Rate to Interest Rates on Long-
Term Bonds 303
* Summary 304 * Key Terms 304
* Exercises 305
Part 6
Inflation, Unemployment,
and Economic Policy
Modern Macroeconomics: From the
Short Run to the Long Run 307
Linking the Short Run and the Long Run 308
The Difference between the Short and Long
Run 308
Wages and Prices and Their Adjustment over
Time 308
xvi

Application 1 Secular Stagnation? 309 Understanding the Expectations Phillips

Curve: The Relationship between
How Wage and Price Changes Move Unemployment and Inflation 329
the Economy Naturally Back to Full
Employment 310 Are the Public’s Expectations about Inf lation
Rational? 329
Returning to Full Employment
from a Recession 310 U.S. Inf lation and Unemployment in the
1980s 330
Returning to Full Employment
from a Boom 311 Shifts in the Natural Rate of Unemployment
in the 1990s 332
Economic Policy and the Speed of
Adjustment 312 Application 2 Estimating the Natural Real Interest
Liquidity Traps or Zero Lower Bound 313 Rate 333

Political Business Cycles 314 How the Credibility of a Nation’s Central Bank
Affects Inflation 333
Application 2 Elections, Political Parties, and Voter
Expectations 314 Application 3 The Ends of Hyperinflations 335

The Economics Behind the Adjustment Inflation and the Velocity of Money 336
Process 315
The Long-Run Neutrality of Money 316 Hyperinflation 338

Crowding Out in the Long Run 318 How Budget Deficits Lead to
Hyperinf lation 339
Application 3 Increasing Health-Care
* Summary 340 * Key Terms 341
Expenditures and Crowding Out 319
* Exercises 341
Classical Economics in Historical
* Economic Experiment  343
Perspective 320
Say’s Law 320
17 Macroeconomic Policy
Keynesian and Classical Debates 321
Debates 344
* Summary 321 * Key Terms 322
* Exercises 322 Should We Balance the Federal
Budget? 345
The Budget in Recent Decades 345
16 The Dynamics of Inflation
and Unemployment 325 Five Debates about Deficits 347

Money Growth, Inflation, and Interest Application 1 Creating The U.S. Federal Fiscal
Rates 326 System Through Debt Policy 351

Inf lation in a Steady State 326 Should the Fed Target Both Inflation
and Employment? 351
How Changes in the Growth Rate of Money
Affect the Steady State 327 Two Debates about Targeting 352

Application 1 Shifts in the Natural Rate Application 2 Would a Policy Rule have Prevented
of Unemployment 328 the Housing Boom? 354
 xvii

Should We Tax Consumption Rather than A Brief History of International Tariff and Trade
Income? 354 Agreements 370
Two Debates about Consumption Taxation 355 Recent Policy Debates and Trade
Agreements 371
Application 3 Is A Vat in Our Future? 357
Are Foreign Producers Dumping Their
* Summary 357 * Key Terms 358
Products? 371
* Exercises 358
Application 3 Does Losing in the Wto Really
Matter? 372
Part 7 Do Trade Laws Inhibit Environmental
The International Economy Protection? 373

Application 4 How American are American

Cars? 374
18 International Trade and Public
Policy 360 Do Outsourcing and Trade Cause Income
Inequality? 375
Benefits from Specialization and Trade 361
Why Do People Protest Free Trade? 376
Production Possibilities Curve 361
* Summary 376 * Key Terms 377
Comparative Advantage and the Terms * Exercises 377
of Trade 363

The Consumption Possibilities Curve 363 19 The World of International

How Free Trade Affects Employment 364 Finance 380

Protectionist Policies 365 How Exchange Rates Are

Determined 381
Import Bans 365
What Are Exchange Rates? 381
Quotas and Voluntary Export Restraints 366
How Demand and Supply Determine Exchange
Responses to Protectionist Policies 367 Rates 382

Application 1 The Impact of Tariffs on the Changes in Demand or Supply 383

Poor 368
Real Exchange Rates and Purchasing Power
What Are the Rationales for Protectionist Parity 385
Policies? 368
Application 1 Big Macs in Switzerland 387
To Shield Workers from Foreign
Competition 369 The Current Account, the Financial Account,
and the Capital Account 388
To Nurture Infant Industries until They
Mature 369 Rules for Calculating the Current, Financial,
and Capital Accounts 388
To Help Domestic Firms Establish Monopolies
in World Markets 369 Application 2 Tax Havens and Global
Imbalances 391
Application 2 Chinese Imports and Local
Economies 370 Fixed and Flexible Exchange Rates 391
xviii

Fixing the Exchange Rate 392 Application 4 The Argentine Financial Crisis 398

Fixed versus Flexible Exchange Rates 393 * Summary 398 * Key Terms 399
* Exercises 399
The U.S. Experience with Fixed and Flexible
Exchange Rates 394 * Economic Experiment  401

Exchange Rate Systems Today 395 Glossary 402

Managing Financial Crises 395 Photo Credits 409

Application 3 A Troubled Euro 396 Index 410

Preface
In preparing this ninth edition, we had three primary goals.
First, we wanted to incorporate the sweeping changes in
the United States and world economies we have all wit-
nessed in the last several years, and the difficulties that the
world economics have continued to experience in recover-
ing from the severe economic downturn. Second, we strived
to update this edition to reflect the latest exciting develop-
ments in economic thinking and make these accessible to
new students of economics. Finally, we wanted to stay true
to the philosophy of the textbook—using basic concepts of
economics to explain a wide variety of timely and interesting
economic applications.
c What’s New To This Edition
In addition to updating all the figures and data, we made a
number of other key changes in this edition. They include
the following:
• At the beginning of each chapter, we carefully refined
our Learning Objectives to match the contents of the
chapter closely. These give the students a preview of
what they will learn in each section of the chapter,
facilitating their learning.
• We discuss in Chapter 6 whether the recent major reces-
sion permanently affected labor force participation.
• We discuss in Chapter 8 the position of the pessimists
who think that technological progress has slowed down.
• We also introduce in Chapter 8 the idea of controlled
experiments in economic policy, as these experiments
have been very influential in recent policy developments.
• We discuss in Chapter 13 the rationale and application
of “stress tests” as a new tool for financial regulation.
• We introduce Janet Yellen, the new Chair of the
Federal Reserve, in Chapter 14, and discuss her prior
experience before she assumed her current role
• We revised and expanded our discussion of the euro
in Chapter 19, reflecting the serious challenges now
­facing the European Monetary Union, particularly
with the experience of Greece.
• We also incorporated a total of 27 exciting new Appli­
cations into this edition. In addition, we incorporated a
total of eight new chapter-opening stories. These fresh
applications and chapter openers show the widespread
relevance of economic analysis.
• In the opening chapters, the new applications include
housing prices in Cuba (Chapter 1), property rights in
urban slums (Chapter 3), and the effects of winds from
the Sahara Desert on the price of chocolate (Chapter 4).
• In the core macroeconomics chapters, the new applica-
tions include understanding the links between unem-
ployment and unemployment insurance (Chapter 6),
how the government promotes high levels of savings
in Singapore (Chapter 7), how Greek citizens hoarded
euros as the talk of crisis grew (Chapter 13), new
research on “ underwater” homeowners (Chapter 12),
the debate on secular stagnation (Chapter 15), and how
accounting for “missing” international financial flows
changes our thinking of global investment patterns
(Chapter 19).
xix
xx

c Applying The Concepts

This is an Applications-driven textbook. We carefully selected over 70 real-world Applications that help students develop
and master essential economic concepts. Here is an example of our approach from Chapter 4, “Demand, Supply, and Market
Equilibrium.”
64 part 1

Application 1

the laW Of DeManD fOr yOUng SMOkerS

APPLying the COnCePts #1: What is the law of demand?

that increases in state cigarette taxes between 1990 and 2005

Each chapter includes three to five thought-provoking

As price decreases and we move downward along the market
demand for cigarettes, the quantity of cigarettes demanded
increases for two reasons. First, people who smoked cigarettes
at the original price respond to the lower price by smoking more.
Second, some people start smoking.
In the United States, cigarette taxes vary across states,
and studies of cigarette consumption patterns show that higher
taxes mean less cigarette consumption by youths. Using data
from the Youth Risk Behavior Surveys (YSBS), one study shows
resulted in less participation (fewer smokers) and lower fre-
quency (fewer cigarettes per smoker).
A change in cigarette taxes in Canada illustrates the sec-
ond effect, the new-smoker effect. In 1994, several provinces
in eastern Canada cut their cigarette taxes in response to the
Applying the Concepts questions that convey impor-
smuggling of cigarettes from the United States (where taxes are
lower), and the price of cigarettes in the provinces decreased tant economic concepts, paired with and illustrated by
by roughly 50 percent. Researchers tracked the choices of 591
youths from the Waterloo Smoking Prevention Program and
concluded that the lower price increased the smoking rate by
an Application that discusses the concept and conveys its
real-world use.
roughly 17 percent. Related to Exercises 1.6 and 1.8.
SOURCES: (1) Anindya Sen and Tony Wirjanto, “Estimating the Impacts of Cigarette
Taxes on Youth Smoking Participation, Initiation, and Persistence: Empirical Evi-
dence from Canada,” Health Economics 19 (2010), pp. 1264–1280. (2) Christopher
Carpentera and Philip J. Cook, “Cigarette Taxes and Youth Smoking: New Evi-
dence from National, State, and Local Youth Risk Behavior Surveys,” Journal of
Health Economics 27 (2008), pp. 287–299.

The market demand is negatively sloped, reflecting the law of demand. This is
sensible, because if each consumer obeys the law of demand, consumers as a group
will too. When the price increases from $4 to $8, there is a change in quantity
demanded as we move along the demand curve from point f to point c. The move-
ment along the demand curve occurs if the price of pizza is the only variable that has

For each Application and Applying the Concepts changed.

question, we provide end-of-chapter

The Supply
Learning Objective 4.2 Curve exercises KeY TermS

that test students’ understanding

Describe and explain the law of supply.
offirmsthe
On the supply side of a market, concepts.
sell their products to consumers. Suppose you
ask the manager of a firm, “How much of your product are you willing to produce
expectations of inflation, p. 326
expectations phillips curve, p. 329
monetarists, p. 340
money illusion, p. 326
rational expectations, p. 330
real wages, p. 326
and sell?” The answer is likely to be “it depends.” The manager’s decision about how growth version of the quantity nominal wages, p. 326 seignorage, p. 339
much to produce depends on many variables, including the following, using pizza as equation, p. 337 quantity equation, p. 336 velocity of money, p. 336
an example:
hyperinflation, p. 338
• The price of the product (e.g., the price per pizza)
• The wage paid to workers
• The price of materials (e.g., the price of dough and cheese) exerCISeS all problems are assignable in MyEconLab exercises that update with real-time data are marked with .
• The cost of capital (e.g., the cost of a pizza oven)
• The state of production technology (e.g., the knowledge used in making pizza) Money Growth, Inflation, and Interest Rates Understanding the Expectations Phillips Curve: The
5.6 Using Open-Economy Multipliers. In an open
• Producers’ econ- about
expectations A leftward
6.4 future pricesshift in the aggregate demand curve cor- Describe how an economy at full employment with inflation Relationship between Unemployment and Inflation
omy, the marginal propensity to consume is 0.9, and responds to a(n) _________ in equilibrium income. differs from one without inflation. Explain the relationship between inflation and unemployment
• Taxes paid to the government or subsidies (payments from the government to
the marginal propensity to import is 0.3. How much of 6.5 Using Multipliers to Determine the Shift of the in the short run and long run.
firms to produce a product)
an increase in investment would be necessary to raise Aggregate Demand Curve. 1.1 The expected real rate of interest is the nominal interest
GDP by 200? What wouldTogether,
quantity supplied be your answer
theseifvariables
this was determine
a how much ofthe
a. Suppose a product
MPC is firms
equalare to
willing to pro-
0.8. Government rate plus the expected inflation rate. _________ (True/ 2.1 If inflation increases less than expected, the actual
The amount ofclosed
a product economy?
that firms are duce and sell, the quantity supplied. We start our
spending discussion
increases of market
by $20 billion.supply
How farwith
does the False) unemployment rate will be _________ (above/below)
willing and
5.7ableExport-Led
to sell. the relationship
Growth Strategies. Manybetween
countriesthe price of a good and the
aggregate quantity
demand curveofshift
that to
good
the supplied,
right? the natural rate.
1.2 Countries with lower rates of money growth have
believe that they need to increase exports in order to b. Now suppose that the MPC is 0.8 and the marginal _________ interest rates. 2.2 James Tobin explained business cycles with rational
grow. Some of this belief is based on long-run consid- propensity to import is 0.2. How far to the right expectations. _________ (True/False)
1.3 If the growth rate of money increases from 3 to
erations, as competing in export markets may induce will the $20 billion in government spending shift 5 percent, initially interest rates will _________. 2.3 The increase in the fraction of young people in the
their firms to innovate. But some countries also focus the aggregate demand curve?
on the short-run benefits. What are these benefits? 1.4 A firm that expects higher profits from higher prices labor force that occurred when the baby-boom genera-
6.6 Falling Exports and Aggregate Demand. Suppose but does not recognize its costs are increasing is suf- tion came of working age tended to _________ (raise/
(Related to Application 4 on page 238.)
M04_OSUL8847_09_SE_C04.indd 64
foreign countries grow less rapidly than anticipated and
26/10/15 5:35 pm fering from _________. lower) the natural rate of unemployment.
U.S. exports also fall.
1.5 Nominal and Real Interest Rates. In Japan in the 2.4 In the late 1980s, as unemployment fell below the natu-
The Income-Expenditure Model and the Aggregate a. Using the income-expenditure model, first show 1990s interest rates were near zero on government ral rate, inflation _________.
Demand Curve how the decrease in exports will decrease U.S. GDP. bonds. Some economists said that it was still possible to 2.5 Targeting the Natural Rate of Unemployment?
Explain how the aggregate demand curve is related to the b. Using your results in part (a), explain how the stimulate investment by creating negative real interest
income-expenditure model. Because the natural rate of unemployment is the
aggregate demand curve shifts with the decrease in rates. If nominal rates could not fall below zero, explain economists’ notion of what constitutes “full employ-
exports. how real interest rates could be made negative. (Hint: ment,” it might seem logical for the Fed to use mon-
6.1 An increase in the price level will _________ GDP and 6.7 The Size of the Wealth Effect and the Slope of Think about inflation.) etary policy to move unemployment toward its natural
thereby move the economy _________ the aggregate the Aggregate Demand Curve. Suppose the wealth 1.6 Money Neutrality, Long-Run Inflation, and the rate. However, many economists believe such a policy
demand curve. effect is very small; that is, a large fall in prices will not Natural Rate. Explain carefully the relationship would be unwise because the natural rate may shift
6.2 At any price level, the income-expenditure model increase consumption by very much. Explain carefully between the concept of monetary neutrality and the over time and policymakers may misjudge the cor-
determines the level of equilibrium output and the cor- why this will imply that the aggregate demand curve idea that the natural rate is independent of the longrun rect rate. What would happen if the Fed targeted a
responding point on the _________ curve. will have a steep slope. inflation rate. 5 percent unemployment rate but the true natural rate
6.3 An increase in the price level will not shift the aggre- 1.7 Taxes, Inflation, and Interest Rates. If a business were 6 percent?
gate demand curve. _________ (True/False) borrows funds at 10 percent per year, the business has 2.6 Hysteresis and the Labor Force Participation Rate.
a 40 percent tax rate, and the annual inflation rate is In economics the term “hysteresis” means that the his-
5 percent, what are the real after-tax costs of funds to tory of the economy has a lingering effect on current
the business? Similarly, if an investor receives a nomi- economic performance. During the U.S. recession
nal return of 8 percent on a savings deposit, the tax rate starting in 2007, the labor force participation rate con-
ECOnOMIC ExpErIMEnT is 30 percent, and the inflation rate is 6 percent, what tinued to remain below the levels that prevailed before
is the after-tax rate of return? the recession. Could this be an example of hysteresis?
ESTIMaTInG ThE MarGInal prOpEnSITy 1.8 Examples of Money Illusion. What do the following Can you suggest any other explanations?
Monthly $1,250 $1,500 $1,750 $2,000
TO COnSUME two quotes have in common?
Disposable 2.7 Oil Price Changes, Vacancies, and the Natural
Income a. “My wages are going up 5 percent a year. If only
For this experiment, each class member is asked to fill out the Rate. During the mid-1970s, changes in oil prices
Expenditures inflation weren’t 5 percent a year, I would be rich.” required products to be produced by different types of
following table. Given a certain monthly income, how would
you spend it and how much would you save? The top row of and savings b. “My bank is paying 10 percent a year, but the firms in different locations. This raised the number of
each column gives you the monthly disposable income. How Food 8 percent inflation rate is just eating up all my real vacancies relative to the unemployment rate. Accord-
would you allocate it each month among the various catego- housing investment gains.” ing to the theory of William Dickens, how did this
ries of spending in the table and savings? Complete each Transportation 341
column in the table. The sum of your entries should equal Medical
your disposable income at the top of each column. After you
Entertainment
have filled out the chart, compute the changes in your savings
Other expenses
and total consumption as your income goes up. What is your
marginal propensity to save (MPS)? What is your marginal Savings
propensity to consume (MPC) over your total expenditures? M16_OSUL8847_09_SE_C16.indd 341 26/10/15 6:10 pm
Graph your consumption function.
MyEconLab
For additional economic experiments, please visit
In addition, some chapters contain an Economic
www.myeconlab.com.
Experiment section that gives students the opportu-
nity to do their own economic analysis.
244

M11_OSUL8847_09_SE_C11.indd 244 26/10/15 6:06 pm


c Why Five Key Principles?
In Chapter 2, “The Key Principles of Economics,” we intro-
duce the following five key principles and then apply them
throughout the book:
1. The Principle of Opportunity Cost. The opportunity
cost of something is what you sacrifice to get it.
2. The Marginal Principle. Increase the level of an activ-
ity as long as its marginal benefit exceeds its marginal
cost. Choose the level at which the marginal benefit
equals the marginal cost.
3. The Principle of Voluntary Exchange. A voluntary
exchange between two people makes both people bet-
ter off.
4. The Principle of Diminishing Returns. If we increase
one input while holding the other inputs fixed, output
will increase, but at a decreasing rate.
5. The Real-Nominal Principle. What matters to people
is the real value of money or income—its purchasing
power—not the face value of money or income.
This approach of repeating five key principles gives students
the big picture—the framework of economic reasoning. We
make the key concepts unforgettable by using them repeat-
edly, illustrating them with intriguing examples, and giv-
ing students many opportunities to practice what they’ve
learned. Throughout the text, economic concepts are con-
nected to the five key principles when the following callout
is provided for each principle:
P RINCI P LE OF O P P ORTUNITY COST
The opportunity cost of something is what you sacrifice to get it.
c How Is The Book Organized?
Chapter 1, “Introduction: What Is Economics?” uses
three current policy issues—traffic congestion, poverty in
Africa, and Japan’s prolonged recession—to explain the
economic way of thinking. Chapter 2, “The Key Principles
xxi
of Economics,” introduces the five principles we return to
throughout the book. Chapter 3, “Exchange and Markets,”
is devoted entirely to exchange and trade. We discuss the
fundamental rationale for exchange and introduce some
of the institutions modern societies developed to facilitate
trade.
Students need to have a solid understanding of demand
and supply to be successful in the course. Many students
have difficulty understanding movement along a curve ver-
sus shifts of a curve. To address this difficulty, we developed
an innovative way to organize topics in Chapter 4, “Demand,
Supply, and Market Equilibrium.” We examine the law of
demand and changes in quantity demanded, the law of sup-
ply and changes in quantity supplied, and then the notion
of market equilibrium. After students have a firm grasp of
equilibrium concepts, we explore the effects of changes in
demand and supply on equilibrium prices and quantities.
Summary of the Macroeconomics Chapters
Part 2, “The Basic Concepts of Macroeconomics” (Chapters
5 and 6), introduces students to the key concepts—GDP,
inflation, unemployment—that are used throughout the text
and in everyday economic discussion. The two chapters in
this section provide the building blocks for the rest of the
book. Part 3, “The Economy in the Long Run” (Chapters 7
and 8), analyzes how the economy operates at full employ-
ment and explores the causes and consequences of economic
growth.
Next we turn to the short run. We begin the discussion
of business cycles, economic fluctuations, and the role of gov-
ernment in Part 4, “Economic Fluctuations and Fiscal Policy”
(Chapters 9 through 12). We devote an entire chapter to the
structure of government spending and revenues and the role
of fiscal policy. In Part 5, “Money, Banking, and Monetary
Policy” (Chapters 13 and 14), we introduce the key elements
of both monetary theory and policy into our economic mod-
els. Part 6, “Inflation, Unemployment, and Economic Policy”
(Chapters 15 through 17), brings the important questions of
the dynamics of inflation and unemployment into our analy-
sis. Finally, the last two chapters in Part 7, “The International
Economy” (Chapter 18 and 19), provide an in-depth analysis
of both international trade and finance.
xxii
A Few Features of Our Macroeconomics
Chapters
The following are a few features of our macroeconomics
chapters:
• Flexibility. A key dilemma confronting economics pro-
fessors has always been how much time to devote to
long-run topics, such as growth and production, versus
short-run topics, such as economic fluctuations and busi-
ness cycles. Our book is designed to let professors choose.
It works like this: To pursue a long-run approach, profes-
sors should initially concentrate on Chapters 1 through 4,
followed by Chapters 5 through 8.
• To focus on economic fluctuations, start with
Chapters 1 through 4, present Chapter 5, “Measuring
a Nation’s Production and Income,” and Chapter 6,
“Unemployment and Inflation,” and then turn to
Chapter 9, “Aggregate Demand and Aggregate Supply.”
• Chapter 11, “The Income-Expenditure Model,” is self-
contained, so instructors can either skip it completely
or cover it as a foundation for aggregate demand.
• Long Run. Throughout most of the 1990s, the U.S.
economy performed very well—low inflation, low
unemployment, and rapid economic growth. This
robust performance led to economists’ increasing
interest in trying to understand the processes of eco-
nomic growth. Our discussion of economic growth in
Chapter 8, “Why Do Economies Grow?” addresses
the fundamental question of how long-term living
s­tandards are determined and why some countries
prosper while others do not. This is the essence of eco-
nomic growth. As Nobel Laureate Robert E. Lucas, Jr.,
once wrote, “Once you start thinking about growth, it
is hard to think of anything else.”
• Short Run. The great economic expansion of the
1990s came to an end in 2001, as the economy started
to contract. The recession beginning in 2007 was
the worst downturn since World War II. Difficult
economic times remind us that macroeconomics is
also concerned with understanding the causes and
­consequences of economic fluctuations. Why do
­e conomies experience recessions and depressions,
and what steps can policymakers take to stabilize the
economy and ease the devastation people suffer from
them? This has been a constant theme of macroeco-
nomics throughout its entire history and is covered
extensively in the text.
• Policy. Macroeconomics is a policy-oriented subject,
and we treat economic policy in virtually every chapter.
We discuss both important historical and more recent
macroeconomic events in conjunction with the theory.
In addition, we devote Chapter 17, “Macroeconomic
Policy Debates,” to three important policy topics that
recur frequently in macroeconomic debates: the role
of government deficits, whether the Federal Reserve
should target inflation or other objectives, and whether
income or consumption should be taxed.

c MyEconLab ®
Digital Features Located in MyEconLab
MyEconLab is a unique online course management, testing,
and tutorial resource. It is included with the eText version
of the book or as a supplement to the print book. Students
and instructors will find the following online resources to
accompany the ninth edition:
• Concept Checks: Each section of each learning objec-
tive concludes with an online Concept Check that con-
tains one or two multiple choice, true/false, or fill-in
questions. These checks act as “speed bumps” that
encourage students to stop and check their understand-
ing of fundamental terms and concepts before moving
on to the next section. The goal of this digital resource
is to help students assess their progress on a section-by-
section basis, so they can be better prepared for home-
work, quizzes, and exams.
• Animations: Graphs are the backbone of introductory
economics, but many students struggle to understand and
work with them. Many of the numbered figures in the
text a supporting animated version online. The goal of
this digital resource is to help students understand shifts
in curves, movements along curves, and changes in equi-
librium values. Having an animated version of a graph
helps students who have difficulty interpreting the static
version in the printed text. Graded practice exercises are
included with the animations. Our experience is that
many students benefit from this type of online learning.
• Graphs Updated with Real-Time Data from
FRED: Approximately 16 graphs are continuously
updated online with the latest available data from
FRED (Federal Reserve Economic Data), which is a
comprehensive, up-to-date data set maintained by the
Federal Reserve Bank of St. Louis.
Students can display a pop-up
graph that shows new data
plotted in the graph. The
goal of this digital feature is to help students under-
stand how to work with data and understand how
including new data affects graphs.
• Interactive Problems and Exercises Updated with
Real-Time Data from FRED: The end-of-chapter
problems in select chapters include real-time data
exercises that use the latest data from FRED. The
book contains several of these specially-selected exer-
cises. The goal of this digital feature is to help students
become familiar with this key data source, learn how to
locate data, and develop skills in interpreting data.
c Integrated Supplements
The authors and Pearson Education have worked together
to integrate the text and media resources to make teaching
and learning easier.
xxiii
For the Instructor
Instructors can choose how much or how little time to
spend setting up and using MyEconLab. Here is a snapshot
of what instructors are saying about MyEconLab:
MyEconLab offers [students] a way to practice
every week. They receive immediate feedback and a
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—Kelly Blanchard, Purdue University
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almost like offering them individual tutors.
—Jefferson Edwards, Cypress Fairbanks College
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it helps offset the skyrocketing cost of textbooks.
Naturally, students love that.
—Doug Gehrke,
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Each chapter contains two preloaded exercise sets
that can be used to build an individualized study plan
for each student. These study plan exercises contain
tutorial resources, including instant feedback, links to
the appropriate learning objective in the eText, pop-up
definitions from the text, and step-by-step guided solu-
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requires no further instructor setup. The online grade
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on the tests and study plan and generates reports by stu-
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Instructors can fully customize MyEconLab to match
their course exactly, including reading assignments,
homework assignments, video assignments, current news
assignments, and quizzes and tests. Assignable resources
include:
• Preloaded exercise assignments sets for each chapter
that include the student tutorial resources mentioned
earlier
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the text and not repeated in the study plan or home-
work exercise sets
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chapter problems and numbered exactly like the book
to make assigning homework easier
• Real-Time-Data Analysis Exercises, marked with ,
allow students and instructors to use the very latest data
from FRED. By completing the exercises, students
become familiar with a key data source, learn how to
locate data, and develop skills in interpreting data.
• In the eText available in MyEconLab, select figures
labeled MyEconLab Real-time data allow students to
display a pop-up graph updated with real-time data
from FRED.
xxiv
• Current News Exercises provide a turnkey way to
assign gradable news-based exercises in MyEconLab.
Each week, Pearson scours the news, finds a current
microeconomics and macroeconomics article, creates
exercises around these news articles, and then automat-
ically adds them to MyEconLab. Assigning and grading
current news-based exercises that deal with the latest
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been more convenient.
• Experiments in MyEconLab are a fun and engag-
ing way to promote active learning and mastery of
important economic concepts. Pearson’s Experiments
program is flexible, easy-to-assign, auto-graded, and
available in Single and Multiplayer versions.
• Single-player experiments allow your students to play
against virtual players from anywhere at any time so
long as they have an Internet connection.
• Multiplayer experiments allow you to assign and man-
age a real-time experiment with your class.
• Pre- and post-questions for each experiment are avail-
able for assignment in MyEconLab.
Another random document with
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with a smile to the two girls.
“Ladies,” he said, lifting his hat again, “at the risk of being
considered impertinent, I wish to ask you if you are going my way? If
so I will help you with your bags, having again cinched what seems
to be the only baggage transportation facilities at this station.”
For once Tavia was really speechless. It was Dorothy who quite
coolly asked the young man:
“Which is your direction?”
“To the Fanuel,” he said.
“That is where we are going,” Dorothy admitted, giving him her
bag again without question.
“Oh!” exclaimed Tavia, “getting into the picture with a bounce,” as
she would have expressed it. “Aren’t you the handiest young man!”
“Thank you,” he replied, laughing. “That is a reputation to make
one proud. I never was in this man’s town before, but I was
recommended to the Fanuel by my boss.”
“Oh!” Tavia hastened to take the lead in the conversation. “We’ve
been here before—Doro and I. And we always stop at the Fanuel.”
“Now, I look on that as a streak of pure luck,” he returned. He
looked at Dorothy, however, not at Tavia.
The boy with the wagon went on ahead and the three voyagers
followed, laughing and chatting, G. K. swinging the girls’ bags as
though they were light instead of heavy.
“I want awfully to know his name,” whispered Tavia, when they
came to the hotel entrance and the young man handed over their
bags again and went to the curb to get his own suitcases from the
boy.
“Let’s,” added Tavia, “go to the clerk’s desk and ask for the rooms
your Aunt Winnie wrote about. Then I’ll get a chance to see what he
writes on the book.”
 “Nonsense, Tavia!” exclaimed Dorothy. “We’ll do nothing of the
kind. We must go to the ladies’ parlor and send a boy to the clerk, or
the manager, with our cards. This is a family hotel, I know; but the
lobby and the office are most likely full of men at this time in the day.”
“Oh, dear! Come on, then, Miss Particular,” groaned Tavia. “And
we didn’t even bid him good-bye at parting.”
“What did you want to do?” laughed Dorothy. “Weep on his
shoulder and give him some trinket, for instance, as a souvenir?”
“Dorothy Dale!” exclaimed her friend. “I believe you have
something up your sleeve. You seem just sure of seeing this nice
cowboy person again.”
“All men from the West do not punch cattle for a living. And it
would not be the strangest thing in the world if we should meet G. K.
again, as he is stopping at this hotel.”
However, the girls saw nothing more of the smiling and agreeable
Westerner that day. Dorothy Dale’s aunt had secured by mail two
rooms and a bath for her niece and Tavia. The girls only appeared at
dinner, and retired early. Even Tavia’s bright eyes could not spy out
G. K. while they were at dinner.
Besides, the girls had many other things to think about, and
Tavia’s mind could not linger entirely upon even as nice a young man
as G. K. appeared to be.
This was their first visit to New York alone, as the more lively girl
indicated. Aunt Winnie White had sprained her ankle and could not
come to the city for the usual fall shopping. Dorothy was, for the first
time, to choose her own fall and winter outfit. Tavia had come on
from Dalton, with the money her father had been able to give her for
a similar purpose, and the friends were to shop together.
They left the hotel early the next morning and arrived at the first
huge department store on their list almost as soon as the store was
opened, at nine o’clock.
An hour later they were in the silk department, pricing goods and
“just looking” as Tavia said. In her usual thoughtless and incautious
way, Tavia dropped her handbag upon the counter while she used
both hands to examine a particular piece of goods, calling Dorothy’s
attention to it, too.
“No, dear; I do not think it is good enough, either for the money or
for your purpose,” Dorothy said. “The color is lovely; but don’t be
guided wholly by that.”
“No. I suppose you are right,” sighed Tavia.
She shook her head at the clerk and prepared to follow her friend,
who had already left the counter. Hastily picking up what she
supposed to be her bag, Tavia ran two or three steps to catch up
with Dorothy. As she did so a feminine shriek behind her startled
everybody within hearing.
“That girl—she’s got my bag! Stop her!”
“Oh! what is it?” gasped Dorothy, turning.
“Somebody’s stolen something,” stammered Tavia, turning around
too.
Then she looked at the bag in her hand. Instead of her own seal-
leather one, it was a much more expensive bag, gold mounted and
plethoric.
“There she is! She’s got it in her hand!”
A woman dressed in the most extreme fashion and most
expensively, darted down the aisle upon the two girls. She pointed a
quivering, accusing finger directly at poor Tavia.
 CHAPTER II
G. K. TO THE RESCUE

Dorothy Dale and her friend Tavia Travers had often experienced
very serious adventures, but the shock of this incident perhaps was
as great and as thrilling as anything that had heretofore happened to
them.
The series of eleven previous stories about Dorothy, Tavia, and
their friends began with “Dorothy Dale: A Girl of To-day,” some years
before the date of this present narrative. At that time Dorothy was
living with her father, Major Frank Dale, a Civil War veteran, who
owned and edited the Bugle, a newspaper published in Dalton, a
small town in New York State.
Then Major Dale’s livelihood and that of the family, consisting of
Dorothy and her small brothers, Joe and Roger, depended upon the
success of the Bugle. Taken seriously ill in the midst of a lively
campaign for temperance and for a general reform government in
Dalton, it looked as though the major would lose his paper and the
better element in the town lose their fight for prohibition; but Dorothy
Dale, confident that she could do it, got out the Bugle and did much,
young girl though she was, to save the day. In this she was helped
by Tavia Travers, a girl brought up entirely differently from Dorothy,
and who possessed exactly the opposite characteristics to serve as
a foil for Dorothy’s own good sense and practical nature.
Major Dale was unexpectedly blessed with a considerable legacy
which enabled him to sell the Bugle and take his children to The
Cedars, at North Birchland, to live with his widowed sister and her
two boys, Ned and Nat White, who were both older than their cousin
Dorothy. In “Dorothy Dale at Glenwood School,” is related these
changes for the better in the fortunes of the Dale family, and as well
there is narrated the beginning of a series of adventures at school
and during vacation times, in which Dorothy and Tavia are the
central characters.
Subsequent books are entitled respectively: “Dorothy Dale’s Great
Secret,” “Dorothy Dale and Her Chums,” “Dorothy Dale’s Queer
Holidays,” “Dorothy Dale’s Camping Days,” “Dorothy Dale’s School
Rivals,” “Dorothy Dale in the City,” and “Dorothy Dale’s Promise,” in
which story the two friends graduate from Glenwood and return to
their homes feeling—and looking, of course—like real, grown-up
young ladies. Nevertheless, they are not then through with
adventures, surprising happenings, and much fun.
About the time the girls graduated from school an old friend of
Major Dale, Colonel Hardin, passed away, leaving his large estate in
the West partly to the major and partly to be administered for the
local public good. Cattle raising was not so generally followed as
formerly in that section and dry farming was being tried.
Colonel Hardin had foreseen that nothing but a system of irrigation
would save the poor farmers from ruin and on his land was the
fountain of supply that should water the whole territory about Desert
City and make it “blossom as the rose.” There were mining interests,
however, selfishly determined to obtain the water rights on the
Hardin Estate and that by hook or by crook.
Major Dale’s health was not at this time good enough for him to
look into these matters actively or to administer his dead friend’s
estate. Therefore, it is told in “Dorothy Dale in the West,” how Aunt
Winnie White, Dorothy’s two cousins, Ned and Nat, and herself with
Tavia, go far from North Birchland and mingle with the miners, and
other Western characters to be found on and about the Hardin
property, including a cowboy named Lance Petterby, who shows
unmistakable signs of being devoted to Tavia. Indeed, after the party
return to the East, Lance writes to Tavia and the latter’s apparent
predilection for the cowboy somewhat troubles Dorothy.
However, after their return to the East the chums went for a long
visit to the home of a school friend, Jennie Hapgood, in
Pennsylvania; and there Tavia seemed to have secured other—and
less dangerous—interests. In “Dorothy Dale’s Strange Discovery,”
the narrative immediately preceding this present tale, Dorothy
displays her characteristic kindliness and acute reasoning powers in
solving a problem that brings to Jennie Hapgood’s father the very
best of good fortune.
Naturally, the Hapgoods are devoted to Dorothy. Besides, Ned and
Nat, her cousins, have visited Sunnyside and are vastly interested in
Jennie. The girl chums now in New York City on this shopping tour,
expect on returning to North Birchland to find Jennie Hapgood there
for a promised visit.
At the moment, however, that we find Dorothy and Tavia at the
beginning of this chapter, neither girl is thinking much about Jennie
Hapgood and her expected visit, or of anything else of minor
importance.
The flashily dressed woman who had run after Tavia down the
aisle, again screamed her accusation at the amazed and troubled
girl:
“That’s my bag! It’s cram full of money, too.”
There was no great crowd in the store, for New York ladies do not
as a rule shop much before luncheon. Nevertheless, besides
salespeople, there were plenty to hear the woman’s unkind
accusation and enough curious shoppers to ring in immediately the
two troubled girls and the angry woman.
“Give me it!” exclaimed the latter, and snatched the bag out of
Tavia’s hand. As this was done the catch slipped in some way and
the handbag burst open.
It was “cram full” of money. Bills of large denomination were rolled
carelessly into a ball, with a handkerchief, a purse for change,
several keys, and a vanity box. Some of these things tumbled out
upon the floor and a young boy stooped and recovered them for her.
“You’re a bad, bad girl!” declared the angry woman. “I hope they
send you to jail.”
“Why—why, I didn’t know it was yours,” murmured Tavia, quite
upset.
 “Oh! you thought somebody had forgotten it and you could get
away with it,” declared the other, coarsely enough.
“I beg your pardon, Madam,” Dorothy Dale here interposed. “It was
a mistake on my friend’s part. And you are making another mistake,
and a serious one.”
She spoke in her most dignified tone, and although Dorothy was
barely in her twentieth year she had the manner and stability of one
much older. She realized that poor Tavia was in danger of “going all
to pieces” if the strain continued. And, too, her own anger at the
woman’s harsh accusation naturally put the girl on her mettle.
“Who are you, I’d like to know?” snapped the woman.
“I am her friend,” said Dorothy Dale, quite composedly, “and I
know her to be incapable of taking your bag save by chance. She
laid her own down on the counter and took up yours——”
“And where is mine?” suddenly wailed Tavia, on the verge of an
hysterical outbreak. “My bag! My money——”
“Hush!” whispered Dorothy in her friend’s pretty ear. “Don’t
become a second harridan—like this creature.”
The woman had led the way back to the silk counter. Tavia began
to claw wildly among the broken bolts of silk that the clerk had not
yet been able to return to the shelves. But she stopped at Dorothy’s
command, and stood, pale and trembling.
A floorwalker hastened forward. He evidently knew the noisy
woman as a good customer of the store.
“Mrs. Halbridge! What is the matter? Nothing serious, I hope?”
“It would have been serious all right,” said the customer, in her
high-pitched voice, “if I hadn’t just seen that girl by luck. Yes, by luck!
There she was making for the door with this bag of mine—and
there’s several hundred dollars in it, I’d have you know.”
“I beg of you, Mrs. Halbridge,” said the floorwalker in a low tone,
“for the sake of the store to make no trouble about it here. If you
insist we will take the girl up to the superintendent’s office——”
 Here Dorothy, her anger rising interrupted:
“You would better not. Mrs. Winthrop White, of North Birchland, is
a charge customer of your store, and is probably just as well known
to the heads of the firm as this—this person,” and she cast what
Tavia—in another mood—would have called a “scathing glance” at
Mrs. Halbridge.
“I am Mrs. White’s niece and this is my particular friend. We are
here alone on a shopping tour; but if our word is not quite as good as
that of this—this person, we certainly shall buy elsewhere.”
Tavia, obsessed with a single idea, murmured again:
“But I haven’t got my bag! Somebody’s taken my bag! And all my
money——”
The floorwalker was glancing about, hoping for some avenue of
escape from the unfortunate predicament, when a very tall, white-
haired and soldierly looking man appeared in the aisle.
“Mr. Schuman!” gasped the floorwalker.
The man was one of the chief proprietors of the big store. He
scowled slightly at the floorwalker when he saw the excited crowd,
and then raised his eyebrows questioningly.
“This is not the place for any lengthy discussion, Mr. Mink,” said
Mr. Schuman, with just the proper touch of admonition in his tone.
“I know! I know, Mr. Schuman!” said the floorwalker. “But this
difficulty—it came so suddenly—Mrs. Halbridge, here, makes the
complaint,” he finally blurted out, in an attempt to shoulder off some
of the responsibility for the unfortunate situation.
“Mrs. Halbridge?” The old gentleman bowed in a most courtly
style. “One of our customers, I presume, Mr. Mink?”
“Oh, yes, indeed, Mr. Schuman,” the floorwalker hastened to say.
“One of our very good customers. And I am so sorry that anything
should have happened——”
“But what has happened?” asked Mr. Schuman, sharply.
 “She—she accuses this—it’s all a mistake, I’m sure—this young
lady of taking her bag,” stuttered Mr. Mink, pointing to Tavia.
“She ought to be arrested,” muttered the excited Mrs. Halbridge.
“What? But this is a matter for the superintendent’s office, Mr.
Mink,” returned Mr. Schuman.
“Oh!” stammered the floorwalker. “The bag is returned.”
“And now,” put in Dorothy Dale, haughtily, and looking straight and
unflinchingly into the keen eyes of Mr. Schuman, “my friend wishes
to know what has become of her bag?”
Mr. Schuman looked at the two girls with momentary hesitation.
There was something compelling in the ladylike look and
behaviour of these two girls—and especially in Dorothy’s speech. At
the moment, too, a hand was laid tentatively upon Mr. Schuman’s
arm.
“Beg pardon, sir,” said the full, resonant voice that Dorothy had
noted the day before. “I know the young ladies—Miss Dale and Miss
Travers, respectively, Mr. Schuman.”
“Oh, Mr. Knapp—thank you!” said the old gentleman, turning to the
tall young Westerner with whom he had been walking through the
store at the moment he had spied the crowd. “You are a discourager
of embarrassment.”
“Oh! blessed ‘G. K.’!” whispered Tavia, weakly clinging to
Dorothy’s arm.
 CHAPTER III
TAVIA IN THE SHADE

Mrs. Halbridge was slyly slipping through the crowd. She had
suddenly lost all interest in the punishment of the girl she had
accused of stealing her bag and her money.
There was something so stern about Mr. Schuman that it was not
strange that the excitable woman should fear further discussion of
the matter. The old gentleman turned at once to Dorothy Dale and
Tavia Travers.
“This is an unfortunate and regrettable incident, young ladies,” he
said suavely. “I assure you that such things as this seldom occur
under our roof.”
“I am confident it is a single occurrence,” Dorothy said, with
conviction, “or my aunt, Mrs. Winthrop White, of North Birchland,
would not have traded with you for so many years.”
“One of our charge customers, Mr. Schuman,” whispered Mr. Mink,
deciding it was quite time now to come to the assistance of the girls.
“Regrettable! Regrettable!” repeated the old gentleman.
Here Tavia again entered her wailing protest:
“I did not mean to take her bag from the counter. But somebody
has taken my bag.”
“Oh, Tavia!” exclaimed her friend, now startled into noticing what
Tavia really said about it.
“It’s gone!” wailed Tavia. “And all the money father sent me. Oh,
dear, Doro Dale! I guess I have thrown my money away, and, as you
prophesied, it isn’t as much fun as I thought it might be.”
“My dear young lady,” hastily inquired Mr. Schuman, “have you
really lost your purse?”
 “My bag,” sobbed Tavia. “I laid it down while I examined some silk.
That clerk saw me,” she added, pointing to the man behind the
counter.
“It is true, Mr. Schuman,” the silk clerk admitted, blushing painfully.
“But, of course, I did not notice what became of the lady’s bag.”
“Nor did I see the other bag until I found it in my hand,” Tavia cried.
The crowd was dissipated by this time, and all spoke in low voices.
Outside the counter was a cash-girl, a big-eyed and big-eared little
thing, who was evidently listening curiously to the conversation. Mr.
Mink said sharply to her:
“Number forty-seven! do you know anything about this bag
business?”
“No—no, sir!” gasped the frightened girl.
“Then go on about your business,” the floorwalker said, waving her
away in his most lordly manner.
Meanwhile, Dorothy had obtained a word with the young Mr.
Knapp who had done her and Tavia such a kindness.
“Thank you a thousand times, Mr. Knapp,” she whispered, her
eyes shining gratefully into his. “It might have been awkward for us
without you. And,” she added, pointedly, “how fortunate you knew
our names!”
He was smiling broadly, but she saw the color rise in his bronzed
cheeks at her last remark. She liked him all the better for blushing so
boyishly.
“Got me there, Miss Dale,” he blurted out. “I was curious, and I
looked on the hotel register to see your names after the clerk
brought it back from the parlor where he went to greet you yesterday.
Hope you’ll forgive me for being so—er—rubbery.”
“It proves to be a very fortunate curiosity on your part,” she told
him, smiling.
“Say!” he whispered, “your friend is all broken up over this. Has
she lost much?”
 “All the money she had to pay for the clothes she wished to buy,
I’m afraid,” sighed Dorothy.
“Well, let’s get her out of here—go somewhere to recuperate.
There’s a good hotel across the street. I had my breakfast there
before I began to shop,” and he laughed. “A cup of tea will revive
her, I’m sure.”
“And you are suffering for a cup, too, I am sure,” Dorothy told him,
her eyes betraying her amusement, at his rather awkward attempt to
become friendly with Tavia and herself.
But Dorothy approved of this young man. Aside from the
assistance he had undoubtedly rendered her chum and herself, G.
Knapp seemed to be far above the average young man.
She turned now quickly to Tavia. Mr. Schuman was saying very
kindly:
“Search shall be made, my dear young lady. I am exceedingly
sorry that such a thing should happen in our store. Of course,
somebody picked up your bag before you inadvertently took the
other lady’s. If I had my way I would have it a law that every shopper
should have her purse riveted to her wrist with a chain.”
It was no laughing matter, however, for poor Tavia. Her family was
not in the easy circumstances that Dorothy’s was. Indeed, Mr.
Travers was only fairly well-to-do, and Tavia’s mother was
exceedingly extravagant. It was difficult sometimes for Tavia to
obtain sufficient money to get along with.
Besides, she was incautious herself. It was natural for her to be
wasteful and thoughtless. But this was the first time in her
experience that she had either wasted or lost such a sum of money.
She wiped her eyes very quickly when Dorothy whispered to her
that they were going out for a cup of tea with Mr. Knapp.
“Oh dear, that perfectly splendid cowboy person!” groaned Tavia.
“And I am in no mood to make an impression. Doro! you’ll have to do
it all yourself this time. Do keep him in play until I recover from, this
blow—if I ever do.”
 The young man, who led the way to the side door of the store
which was opposite the hotel and restaurant of which he had
spoken, heard the last few words and turned to ask seriously:
“Surely Miss Travers did not lose all the money she had?”
“All I had in the world!” wailed Tavia. “Except a lonely little five
dollar bill.”
“Where is that?” asked Dorothy, in surprise.
“In the First National Bank,” Tavia said demurely.
“Oh, then, that’s safe enough,” said Mr. Knapp.
“I didn’t know you had even that much in the bank,” remarked
Dorothy, doubtfully. “The First National?”
“Yep!” declared Tavia promptly, but nudged her friend. “Hush!” she
hissed.
Dorothy did not understand, but she saw there was something
queer about this statement. It was news to her that her chum ever
thought of putting a penny on deposit in any bank. It was not like
Tavia.
“How do you feel now, dear?” she asked the unfortunate girl, as
they stepped out into the open air behind the broad-shouldered
young Westerner, who held the door open for their passage.
“Oh, dear me!” sighed Tavia. “I’m forty degrees in the shade—and
the temperature is still going down. What ever shall I do? I’ll be
positively naked before Thanksgiving!”
 CHAPTER IV
SOMETHING ABOUT “G. KNAPP”

But how can three people with all the revivifying flow of youth in
their veins remain in the dumps, to use one of Tavia’s own
illuminating expressions. Impossible! That tea at the Holyoke House,
which began so miserably, scaled upward like the notes of a
coloratura soprano until they were all three chatting and laughing like
old friends. Even Tavia had to forget her miserable financial state.
Dorothy believed her first impression of G. Knapp had not been
wrong. Indeed, he improved with every moment of increasing
familiarity.
In the first place, although his repartee was bright enough, and he
was very jolly and frank, he had eyes and attention for somebody
besides the chatterbox, Tavia. Perhaps right at first Tavia was a little
under the mark, her mind naturally being upon her troubles; but with
a strange young man before her the gay and sparkling Tavia would
soon be inspired.
However, for once she did not absorb all the more or less helpless
male’s attention. G. Knapp insisted upon dividing equally his
glances, his speeches, and his smiles between the two young ladies.
They discovered that his full and proper name was Garford Knapp
—the first, of course, shortened to “Garry.” He was of the West,
Western, without a doubt. He had secured a degree at a Western
university, although both before and after his scholastic course he
had, as Tavia in the beginning suggested, been a “cowboy person.”
“And it looks as if I’d be punching cows and doing other chores for
Bob Douglas, who owns the Four-Square ranch, for the rest of my
natural,” was one thing Garry Knapp told the girls, and told them
cheerfully. “I did count on falling heir to a piece of money when Uncle
Terrence cashed in. But not—no more!”
 “Why is that?” Dorothy asked, seeing that the young man was
serious despite his somewhat careless way of speaking.
“The old codger is just like tinder,” laughed Garry. “Lights up if a
spark gets to him. And I unfortunately and unintentionally applied the
spark. He’s gone off to Alaska mad as a hatter and left me in the
lurch. And we were chums when I was a kid and until I came back
from college.”
“You mean you have quarreled with your uncle?” Dorothy queried,
with some seriousness.
“Not at all, Miss Dale,” he declared, promptly. “The old fellow
quarreled with me. They say it takes two to make a quarrel. That’s
not always so. One can do it just as e-easy. At least, one like Uncle
Terrence can. He had red hair when he was young, and he has a
strong fighting Irish strain in him. The row began over nothing and
ended with his lighting out between evening and sunrise and leaving
me flat.
“Of course, I broke into a job with Bob Douglas right away——”
“Do you mean, Mr. Knapp, that your uncle went away and left you
without money?” Dorothy asked.
“Only what I chanced to have in my pocket,” Garry Knapp said
cheerfully. “He’d always been mighty good to me. Put me through
school and all that. All I have is a piece of land—and a good big
piece—outside of Desert City; but it isn’t worth much. Cattle raising
is petering out in that region. Last year the mouth and hoof disease
just about ruined the man that grazed my land. His cattle died like
flies.
“Then, the land was badly grazed by sheepmen for years. Sheep
about poison land for anything else to live on,” he added, with a
cattleman’s usual disgust at the thought of “mutton on the hoof.”
“One thing I’ve come East for, Miss Dale, is to sell that land. Got a
sort of tentative offer by mail. Bob wanted a lot of stuff for the ranch
and for his family and couldn’t come himself. So I combined his
business and mine and hope to make a sale of the land my father
left me before I go back.
 “Then, with that nest-egg, I’ll try to break into some game that will
offer a man-sized profit,” and Garry Knapp laughed again in his
mellow, whole-souled way.
“Isn’t he just a dear?” whispered Tavia as Garry turned to speak to
the waiter. “Don’t you love to hear him talk?”
“And have you never heard from your old uncle who went away
and left you?” Dorothy asked.
“Not a word. He’s too mad to speak, let alone write,” and a cloud
for a moment crossed the open, handsome face of the Westerner.
“But I know where he is, and every once in a while somebody writes
me telling me Uncle Terry is all right.”
“But, an old man, away up there in Alaska——?”
“Bless you, Miss Dale,” chuckled Garry Knapp. “That dear old
codger has been knocking about in rough country all his days. He’s
always been a miner. Prospected pretty well all over our West. He’s
made, and then bunted away, big fortunes sometimes.
“He always has a stake laid down somewhere. Never gets real
poor, and never went hungry in his life—unless he chanced to run
out of grub on some prospecting tour, or his gun was broken and he
couldn’t shoot a jackrabbit for a stew.
“Oh, Uncle Terrence isn’t at all the sort of hampered prospector
you read about in the books. He doesn’t go mooning around,
expecting to ‘strike it rich’ and running the risk of leaving his bones in
the desert.
“No, Uncle Terry is likely to make another fortune before he dies
——”
“Oh! Then maybe you will be rich!” cried Tavia, breaking in.
“No.” Garry shook his head with a quizzical smile on his lips and in
his eyes. “No. He vowed I should never see the color of his money.
First, he said, he’d leave it to found a home for indignant
rattlesnakes. And he’d surely have plenty of inmates, for rattlers
seem always to be indignant,” he added with a chuckle.
 Dorothy wanted awfully to ask him why he had quarreled with his
uncle—or vice versa; but that would have been too personal upon
first meeting. She liked the young man more and more; and in spite
of Tavia’s loss they parted at the end of the hour in great good
spirits.
“I’m going to be just as busy as I can be this afternoon,” Garry
Knapp announced, as they went out. “But I shall get back to the hotel
to supper. I wasn’t in last night when you ladies were down. May I
eat at your table?” and his eyes squinted up again in that droll way
Dorothy had come to look for.
“How do you know we ate in the hotel last evening?” demanded
Tavia, promptly.
“Asked the head waiter,” replied Garry Knapp, unabashed.
“If you are so much interested in whether we take proper
nourishment or not, you had better join us at dinner,” Dorothy said,
laughing.
“It’s a bet!” declared the young Westerner, and lifting his broad-
brimmed hat he left the girls upon the sidewalk outside the
restaurant.
“Isn’t he the very nicest—but, oh, Doro! what shall I do?”
exclaimed the miserable Tavia. “All my money——”
“Let’s go back and see if it’s been found.”
“Oh, not a chance!” gasped Tavia. “That horrid woman——”
“I scarcely believe that we can lay it to Mrs. Halbridge’s door in
any particular,” said Dorothy, gravely. “You should not have left your
bag on the counter.”
“She laid hers there! And, oh, Doro! it was full of money,” sighed
her friend.
“Probably your bag had been taken before you even touched
hers.”
“Oh, dear! why did it have to happen to me—and at just this time.
When I need things so much. Not a thing to wear! And it’s going to
be a cold, cold winter, too!”
Tavia would joke “if the heavens fell”—that was her nature. But
that she was seriously embarrassed for funds Dorothy Dale knew
right well.
“If it had only been your bag that was lost,” wailed Tavia, “you
would telegraph to Aunt Winnie and get more money!”
“And I shall do that in this case,” said her friend, placidly.
“Oh! no you won’t!” cried Tavia, suddenly. “I will not take another
cent from your Aunt Winnie White—who’s the most blessed,
generous, free, open-handed person who ever——”
“Goodness! no further attributes?” laughed Dorothy.
“No, Doro,” Tavia said, suddenly serious. “I have done this thing
myself. It is awful. Poor old daddy earns his money too hardly for me
to throw it away. I should know better. I should have learned caution
and economy by this time with you, my dear, as an example ever
before me.
“Poor mother wastes money because she doesn’t know. I have
had every advantage of a bright and shining example,” and she
pinched Dorothy’s arm as they entered the big store again. “If I have
lost my money, I’ve lost it, and that’s the end of it. No new clothes for
little Tavia—and serves her right!” she finished, bitterly.
Dorothy well knew that this was a tragic happening for her friend.
Generously she would have sent for more money, or divided her own
store with Tavia. But she knew her chum to be in earnest, and she
approved.
It was not as though Tavia had nothing to wear. She had a full and
complete wardrobe, only it would be no longer up to date. And she
would have to curtail much of the fun the girls had looked forward to
on this, their first trip, unchaperoned, to the great city.
 CHAPTER V
DOROTHY IS DISTURBED

Nothing, of course, had been seen or heard of Tavia’s bag. Mr.

Schuman himself had made the investigation, and he came to the
girls personally to tell them how extremely sorry he was. But being
sorry did not help.
“I’m done for!” groaned Tavia, as they returned to their rooms at
the hotel just before luncheon. “I can’t even buy a stick of peppermint
candy to send to the kids at Dalton.”
“How about that five dollars in the bank?” asked Dorothy, suddenly
remembering Tavia’s previous and most surprising statement. “And
how did you ever come to have a bank account? Is it in the First
National of Dalton?”
There was a laugh from Tavia, a sudden flash of lingerie and the
display of a silk stocking. Then she held out to her chum a neatly
folded banknote wrapped in tissue paper.