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SOLUTIONS TO CHAPTER 6
Problem 6.1
(a) The IS curve in Figure 6.1 is given by
1
(1) ln Yt a ln Yt 1 rt , where a ≡ – (1/θ)lnβ.
The slope of the IS curve is given by dr/dY for a given Yt+1. Differentiating equation (1) yields
1 1
(2) dYt dr t ,
Yt
and thus the slope is given by
dr t
(3) .
dYt IS Yt
Thus an increase in θ increases the slope in absolute value and makes the IS curve steeper. Intuitively, an
increase in the coefficient of relative risk aversion, θ, means that households are less willing to substitute
consumption across time. Thus any given change in r results in a smaller change in consumption and
therefore output along the IS curve. In addition to the change in slope, an increase in θ reduces the
constant term, a, and thus causes the IS curve to shift down.
The LM curve is given by the combinations of Y and r that satisfy the following equation for a given
level of real money holdings:
1/
Mt 1 rt
(4) Yt / .
Pt rt
Taking the natural log of both sides gives us
M 1 1
(5) ln t ln Yt ln(1 rt ) ln rt .
Pt
The slope of the LM curve is given by dr/dY for a given M/P. From equation (5)
1 1 1 1 1
(6) 0 dYt drt drt .
Yt 1 rt rt
Solving for dr/dY gives us
dr t r (1 rt )
(7) t .
dYt LM Yt
Thus an increase in θ also makes the LM curve steeper.
(b) The IS curve does not depend on χ at all, so it is unchanged. From equation (7) we can see that a
change in χ does not affect the slope of the LM curve. From equation (4) we can see that a decrease in χ
increases the demand for real money balances at a given level of output and the real interest rate. This
implies that the LM curve must shift up. Intuitively, with a fixed real money supply, any given level of
output would now require a higher real interest rate for the demand for money to equal the fixed supply.
Thus the new LM curve associated with the lower value of χ must lie above the old LM curve.
(c) Again, the IS curve does not depend on Γ(•) at all, so it does not change. As in the text, consider a
balanced budget change in Mt/Pt and Ct. Specifically, suppose the household raises Mt/Pt by dm and
lowers Ct by [it/(1 + it)]dm. At the margin, this change must not affect utility. The utility cost of this
change is still U'(Ct)[it/(1 + it)]dm. With our modification to the utility function, the utility benefit is now
given by B Γ'(Mt/Pt)dm. Thus the first-order condition for optimal money holdings is now
6-2 Solutions to Chapter 6
M i
(8) B' t t U (C t ) .
Pt 1 i t
Given the form of Γ(•) and U(•) , and the fact that Ct = Yt this implies
M i
(9) B t t Yt .
Pt 1 it
Dividing both sides of equation (9) by B and then taking both sides of the resulting expression to the
exponent -1/χ, we have
1/
Mt 1 rt
(10) B1 / Yt / ,
Pt rt
where we have also used the fact that with the price level fixed, the real and nominal interest rates are
equivalent. Intuitively, a decrease in B reduces the utility from holding any given quantity of real money
balances. Thus, as we can see from equation (10), it reduces optimal money holdings for any given level
of output and the real interest rate. This implies that the LM curve must shift down. With the lower value
of B, any given level of output must now be associated with a lower real interest rate for real money
demand to remain equal to the fixed real money supply.
Problem 6.2
(a) We need to find the average cost per unit time of conversions plus foregone interest, which we will
denote AC. The cost of conversions in nominal terms is P times C and the number of conversions per
unit time is 1/τ. Average foregone interest per unit time is average money holdings, αYPτ/2 multiplied
by the nominal interest rate, i. Thus,
PC YP
(1) AC i.
2
The first-order condition for τ is
AC PC YP
(2) i0.
2 2
This simplifies to
C Yi
(3) .
2 2
Solving for the optimal choice, τ* yields
12
2C
(4) * .
Yi
Note that 2 AC 2 2 PC 3 0 and so τ* is a minimum.
Problem 6.3
(a) Substituting the consumption function, Ct = a + bYt-1, and the assumption about investment,
It = Kt* – cYt-2, into the equation for output, Yt = Ct + It + Gt, yields
(1) Yt = a + bYt-1 + Kt* – cYt-2 + Gt.
Substituting for the desired capital stock, Kt* = cYt-1 , and for the constant level of government
purchases, Gt = G , yields
(2) Yt = a + bYt-1 + cYt-1 – cYt-2 + G .
Collecting terms in Yt-1 gives us output in period t as a function of Yt-1, Yt-2 and the parameters of the
model:
(3) Yt = a + (b + c)Yt-1 – cYt-2 + G .
(b) With the assumptions of b = 0.9 and c = 0.5, output in period t is given by
(4) Yt = a + 1.4Yt-1 – 0.5Yt-2 + G .
Throughout the following, the change in a variable represents the change from the path that variable
would have taken if G had simply remained constant at G .
In period t,
(5) Yt = a + 1.4Yt-1 – 0.5Yt-2 + G + 1,
and thus the change in output from the path it would have taken is given by
(6) Yt = +1.
In period t + 1, using the fact that equation (4) will hold in all future periods,
(7) Yt+1 = 1.4Yt – 0.5Yt-1 = 1.4(+1) – 0.5(0) = +1.4.
In period t + 2,
(8) Yt+2 = 1.4Yt+1 – 0.5Yt = 1.4(+1.4) – 0.5(+1) = +1.46.
In period t + 3,
(9) Yt+3 = 1.4Yt+2 – 0.5Yt+1 = 1.4(+1.46) – 0.5(+1.4) = +1.344.
With similar calculations, one can show that Yt+4 = +1.15, Yt+5 = 0.938 and so on. Thus output
follows a "hump-shaped" response to the one-time increase in government purchases of one. The
maximum effect is felt two periods after the increase in G and the effect then goes to 0 over time.
6-4 Solutions to Chapter 6
Problem 6.4
Problem 6.5
Suppose the increase in g occurs in time period t and define g gH – gL > 0. In what follows, the
change in a variable refers to the difference between its actual value and the value it would have had in
the absence of the rise in g.
(a) In this case, unemployment does not need to change in order for price inflation to remain constant.
Wage inflation simply rises by g since it is given by
(1) wt t g t .
Since price inflation is given by
(2) t t 1 (u t u) ,
then remains constant and u remains equal to u .
(8) w w
t 1 t (u t 1 u ) ,
we can see that w t 1 will be g higher if u t 1 u . Thus the period after the shock, unemployment must
return to u̅ if priceinflation is to remain constant. The required path of the unemployment rate is shown
in the figure at right. The rise in g causes a one-period drop in u.
t must rise by g for price inflation to be constant. Since wage inflation is given by
(c) As in part (b), w
(9) wt t 1 (u t u ) ,
this means that unemployment must fall in period t. As in part (b), the required change in the
unemployment rate is
1
(10) u t g .
(d) As in parts (b) and (c), w t must rise by g for price inflation to be constant. To see what this
implies for unemployment in period t, we first need to calculate the change in ĝ t due to the change in g.
Since
(14) ĝ t ĝ t 1 (1 )g t ,
we can write
(15) ĝ t (1 )g .
6-6 Solutions to Chapter 6
Similar analysis for period t + 1 would yield the following required change in the unemployment rate:
1
(25) u t 2 [1 (1 ) (1 ) 2 (1 )]g .
And in general, in period t + s, the change in the unemployment rate required for constant price inflation
is given by
1
(26) u t s [1 (1 ) (1 ) 2 (1 ) s (1 )]g .
Allowing s to go to infinity, we can write
(27) 1 (1 ) (1 ) 2 (1 ) 1 [(1 )(1 2 )] .
Since 0 < < 1, the infinite series 1 + ρ + ρ2 + … converges and we can write
1
(28) 1 (1 ) (1 ) 2 (1 ) 1 [(1 ) ] 11 0 .
(1 )
Thus
(29) lim u t s 0 .
s
In this case, if price inflation is to remain constant when g rises, the unemployment rate must fall at time t
and then rise back until it asymptotically approaches its original value.
Solutions to Chapter 6 6-7
Problem 6.6
(a) Substitute the IS equation,
(1) Yt = − rt/θ
into the money-market equilibrium condition,
(2) m p L(r e , Y) ,
to obtain
r
(3) m p L(r e , t ) .
With P P and e = 0, equation (3) simplifies to
r
(4) m p L(r, t ) ,
where p ln(P) . Differentiating both sides of equation (4) with respect to m gives us
dr 1 dr
(5) 1 L r LY ( ) .
dm dm
Solving for dr/dm yields
dr 1
(6) .
dm 1
Lr LY ( )
1
Since L r 0 , L Y 0 , and < 0, dr/dm < 0. Thus an increase in the nominal money supply does
lower the real interest rate.
As shown in part (b), the first term on the right-hand side of equation (11) is negative. The denominator
of the second term on the right-hand side is negative, as shown previously. Since L e 0 and
r
e
d /dm > 0, the numerator is also negative and thus that second term is positive. Thus dr/dm < 0 again,
meaning that an increase in the nominal money supply, m, lowers the real interest rate. Comparing
equations (9) and (11) we can see that dr/dm is larger in absolute value here. Thus, if expected inflation
increases when the nominal money supply rises – as it does here – a given change in m has a larger effect
on the real interest rate. Thus a given change in r requires a smaller change in m than in part (b).
(d) We can substitute the assumptions that dp/dm = 1 and de/dm = 0 into equation (10) to obtain
dr 1 dr
(12) 1 1 L r e LY ( ) .
dm dm
And thus
dr
(13) 0.
dm
With complete and instantaneous price adjustment, a change in the nominal money supply does not affect
the real interest rate.
Problem 6.7
(a) Recall that the AD curve is derived from the IS and MP curves. The IS curve is given by
(1) y(t) = – [i(t) – (t)]/θ,
with y'(•) < 0 so that the IS curve is downward-sloping in (y, r) space. The monetary-policy rule is given
by
(2) r(t) = r(y(t) – y (t),(t)),
which, with the assumption that y (t) = 0, simplifies to
(3) r(t) = r(y(t),(t)),
with the constraint that the nominal interest rate, i(t) = r(t) + (t), cannot be negative. Given this
constraint, we can treat the MP curve as horizontal over the range of output for which the Federal
Reserve's desired value of r would result in a negative value of i; that is, over the range of y for which
r(y(t),(t)) + < 0 or r(y(t),(t)) < – .
horizontal portion of the MP curve shifts up; the real interest rate at which the constraint of a non-
negative nominal interest rate becomes binding is now higher (at a 5 percent rate of inflation, the Fed
cannot achieve a real interest rate below negative 5 percent; at a 2 percent rate of inflation, the Fed
cannot achieve an r below negative 2 percent).
The new MP curve is labeled MP( ~ ) in the figure. As drawn, at the level of output where planned and
actual expenditures are equal given the Federal Reserve's choice of r, the constraint is just binding; that
is, r(~y, ~ 0 or r(~
) ~ y, ~
) ~
. In terms of the figure, this means that the IS curve intersects the kink
in the MP curve. The fall in inflation raises output from y1 to ~y . Thus over the range of inflation rates
exceeding ~ , a drop in inflation increases output along the AD curve as it does in our standard model.
y
(0) ~y
time
~
y (0)
time
y
(0)
t1 time
~
~y
y(0)
t1 time
Solutions to Chapter 6 6-11
y
~
~y
(0)
time
y(0)
time
the real interest rate rises. Thus output must fall. See the figures above.
Problem 6.8
The MP equation is now given by
(1) rt by t u MP
t ,
where
(2) u MP
t MP u MP MP
t 1 e t .
The IS curve no longer contains a shock term and is given by
1
(3) y t E t [ y t 1 ] rt .
Note that equation (5) holds in all future periods. Denoting ϕ ≡ θ/(θ + b), this means we can write
6-12 Solutions to Chapter 6
(6) y t j E t j[ y t j1 ] u MP t j for j = 1,2,3, …
Taking expectations of both sides of (6) as of time t, and using equation (2) and the law of iterated
projections gives us
j
(7) E t [ y t j ] E t [ y t j1 ] MP u MP
t .
We can now iterate equation (5) forward. First, substitute for E t[Y t + 1] to obtain
(8) y t u MP t ( E t [ y t 2 ] MP u MP t ).
Now substitute for E t[Y t + 2] to yield
2
(9) y t u MP t MP u MP
t 2 ( E t [ y t 3 ] 2MP u MP
t ),
and so on. We can therefore rewrite (9) as
(10) y t (1 MP 2 2MP ) u MP n
t lim E t [ y t n ] .
n
Since ϕ < 1, the limit would fail to converge to 0 only if E t[Y t + n] diverged. Since this cannot happen—
agents cannot expect output to diverge—then the limit converges to 0. Thus, equation (10) becomes
/
(11) y t u MP
t .
1 MP
Using the definition of φ ≡ θ/(θ + b) we can write (11) as
1
(12) y t b u MP ,
b MP t
b
or simply
1
(13) y t u MP
t .
b MP
Problem 6.9
(a) Substituting the MP equation given by
(1) r t = by t ,
into the IS equation given by
1
(2) y t E t [ y t 1 ] rt u IS t ,
gives us
b
(3) y t E t [ y t 1 ] y t u IS t .
Equation (3) simplifies to
IS
(4) y t E t [ y t 1 ] ut .
b b
(8) E t [u IS IS
t 1 ] IS u t .
Substituting equation (8) into (7) yields
IS
(9) Au IS
t AISu IS
t ut .
b b
Dividing both sides of equation (9) by u IS
t and collecting the terms in A gives us
(10) 1
IS A .
b b
Equation (10) simplifies to
b IS
(11) A ,
b b
or
(12) A .
b IS
Thus, our solution is
(13) y t u IS
t ,
b IS
which is the same as the solution given by equation (6.35) in the text.
(b) Substituting our conjectures for inflation and output in period t into the AS equation gives us our
first equation:
(14) Cu IS IS
t D t 1 t 1 [Au t B t 1 ] .
Substituting for inflation and output into the new form of the MP equation gives us our second equation:
(15) rt b(Au IS IS
t B t 1 ) c (Cu t D t 1 ) .
Substituting for output in the IS equation yields our third equation:
(16) Au IS IS
t B t 1 E t [Yt 1 ] (1/ )rt u t .
Finally, our conjecture that the solution is of the form
(17) y t Au IS
t B t 1 ,
implies that
(18) E t [ y t 1 ] AE t [u IS
t 1 ] B t .
Substituting equation (8) for E t [u IS
t 1 ] and our conjecture for πt yields our fourth equation:
(19) E t [ y t 1 ] A ISu IS IS
t B(Cu t D t 1 ) .
Problem 6.10
With this change, equation (6.31) in the text becomes
1
(1) y t E t [ y t 1 ] rt u IS
t .
Substituting the MP curve, given by
6-14 Solutions to Chapter 6
(2) rt = byt ,
into equation (1) gives us
1
(3) y t E t [ y t 1 ] by t u IS t .
Collecting the terms in yt yields
b IS
(4)
y t E t [ y t 1 ] u t .
Defining ϕ ≡ [θ/(θ + b)] and multiplying both sides of equation (4) by ϕ gives us
(5) y t E t [ y t 1 ] u IS
t .
Note that equation (5) holds in all future periods so we can write
(6) y t j E t j[ y t j1 ] u IS
t j for j = 1,2,3,…
Since
(7) u IS IS
t ISu t 1 e t ,
IS
where eIS is white noise, taking expectations of both sides of (6) as of time t implies
j IS
(8) E t [ y t j ] E t [ y t j1 ] IS ut .
In equation (8), we have used the law of iterated projections, which states that
E t [ E t j[ y t j1 ]] E t [ y t j1 ] . We can now iterate equation (5) forward. That is, we first express
Et[yt+1] in terms of Et[yt+2] and E t [u IS IS
t 1 ] . We then express Et[yt+2] in terms of Et[yt+3] and E t [u t 2 ] and
so on. Doing this yields
y t u IS IS
t E t [ y t 2 ] ISu t
u IS 2 IS 2 2
2 IS
t ISu t E t [ y t 3 ] ISu t
(9) u IS 2 IS 3 2 2 IS n n
t ISu t ISu t lim E t [ y t n ]
n
u IS n n
t lim E t [ y t n ] .
1 IS n
Since both ϕ and ω are less than one, the second term on the right-hand-side of equation (9) will converge
to 0 unless Et[yt+n] diverges. As discussed in the text, for Et[yt+n] to diverge, agents would have to expect
y to diverge, which cannot happen. Thus assuming lim n n E t [ y t n ] 0 is appropriate.
n
Substituting for ϕ in equation (9) leaves us with an expression analogous to equation (6.37) in the text:
(10) y t b u IS
t ,
1 IS
b
which simplifies to
(11) y t u IS
t .
b IS
From equation (11), we can see that the lower is ω – the less responsive is current demand to
expectations of future output – the smaller is the effect on output of shocks to the IS curve. This is
intuitive because the shocks to the IS curve are serially correlated. If ρIS is positive, then a positive shock
today is expected to raise future output. The less that current demand responds to that increase in
expected future output, the less that output rises today.
Solutions to Chapter 6 6-15
Problem 6.11
(a) Substituting the expression for aggregate demand, y = m – p, into the equation that defines the
optimal price for firms, p* = p + y, yields p* = p + (m – p) or simply
(1) p* = (1 – )p + m.
Substituting the aggregate price level, p = fp*, and m = m' into equation (1) yields
(2) p* = (1 – )fp* + m'.
Solving for p* gives us
(3) p* m .
1 (1 )f
Now substitute equation (3) into the expression for the aggregate price level, p = fp*, to obtain
f
(4) p m .
1 (1 )f
Substituting equation (4) and m = m' into the expression for aggregate demand, y = m – p, yields
f 1 f f f
(5) y m m m ,
1 (1 )f 1 (1 )f
or simply
(1 f )
(6) y m .
1 (1 )f
(b) Substituting equation (3), the expression for a firm's optimal price, into the expression describing the
firm's incentive to adjust its price, Kp*2, yields
2
m
2
(7) Kp * K .
1 (1 )f
We need to plot this incentive to change price as a function of f, the fraction of firms that change their
price. The following derivatives will be useful:
(8)
Kp *2 2K(1 )(m) 2
,
f 1 (1 )f 3
and
(9)
2 Kp *2 6K(1 ) (m)
2 2
.
f 2 1 (1 )f 4
6-16 Solutions to Chapter 6
Thus when > 1, the incentive for a firm to adjust its price is a decreasing function of how many other
firms change their price. See the figure.
Kp*2
(c) In the case of < 1, there can be a
situation where both adjustment by all
firms and adjustment by no firms are Km'2 B
equilibria.
A
Point A is an equilibrium with f = 0.
K2m'2
Consider the situation of a representative
firm at point A. If no one else is changing 1 f
their price, the profits a firm loses by not
changing its price, which are given by
Kp*2 = K2m'2, are less than the menu cost of Z. Thus it is optimal for the representative firm not to
change its price. This is true for all firms and thus no one changing price is an equilibrium.
Point B is also an equilibrium with f = 1. Consider the situation of a representative firm at point B. If
everyone else is changing their price, the profits a firm loses by not changing its price, Kp* 2 = Km'2,
exceed the menu cost of Z. Thus it is optimal for the representative firm to change its price. This is true
for all firms and thus everyone changing price is also an equilibrium.
Solutions to Chapter 6 6-17
Now consider the situation of f = 1 at point B. If everyone else is changing their price, the profits that a
representative firm would lose by not changing its price, Kp*2 = Km'2, are less than the menu cost of Z.
Thus it is optimal for the representative firm not to change its price. This is true for all firms and thus it
cannot be an equilibrium for all firms to change their price.
From this discussion, we can see that the equilibrium in this case is for fraction f EQ of firms to change
their price. If fraction fEQ of firms are changing their price, the profit that a representative firm would
lose by not changing its price is exactly equal to the menu cost, Z. Thus the representative firm is
indifferent and there is no tendency for the economy to move away from this point where fraction f EQ of
firms are changing their price.
Problem 6.12
(a) (y1 , r*(y1 )) is the profit a firm receives at aggregate output level y1, if it charges the profit-
maximizing real price, r*(y1 ). (y1 , r*(y0 )) is the profit a firm receives at aggregate output level y1 if it
continues to charge a real price of r*(y0 ), which was the optimal price to charge when aggregate output
was y0 . Thus G = (y1 , r*(y1 )) – (y1 , r*(y0 )) is the additional profit a firm would receive if, when
aggregate output changes from y0 to y1 , the firm changes its price to its new profit-maximizing level.
This represents, therefore, the firm's incentive to change its price in the face of a change in aggregate real
output.
Using equation (2) to find the second derivative of G with respect to y1 gives us
(4) 2G/y12 = 11(y1, r*(y1)) + 12(y1, r*(y1))[r* '(y1)] +
6-18 Solutions to Chapter 6
Now differentiate both sides of the equation that implicitly defines r*(y0), 2 (y0, r*(y0)) = 0, with respect
to y0 to obtain
(7) 21(y0, r*(y0)) + 22(y0, r*(y0))[r* '(y0)] = 0,
and thus
(8) 21(y0, r*(y0)) = – 22(y0, r*(y0))[r* ' (y0)].
Substituting equation (8) into equation (6) yields
(9) 2 G/y12 |y1=y0 = –222(y0, r*(y0))[r* '(y0)]2 + 22(y0, r*(y0))[r* '(y0)]2
= – 22(y0, r*(y0))[r* '(y0)]2.
Thus, since G and G/y1 evaluated at y1 = y0 are both equal to zero, substituting equation (9) into
equation (1) gives us the second-order Taylor approximation:
(10) G – 22(y0, r*(y0))[r* '(y0)]2[y1 – y0 ]2/2.
(c) The [r* '(y0)]2 component reflects the degree of real rigidity. It tells us how much the firm's profit-
maximizing real price responds to changes in aggregate real output. The 22(y0, r*(y0)) component
reflects insensitivity of the profit function. It tells us the curvature of the profit function and thus the cost
in lost profits from the firm allowing its real price to differ from its profit-maximizing value.
Problem 6.13
(a) Substituting the expression for the nominal wage, w = p, into the aggregate price equation,
p = w + (1 – )l – s, yields p = p + (1 – )l – s. Solving for p yields
(1) p = [(1 – )l – s]/(1 – ).
Substituting the aggregate output equation, y = s + l, and equation (1) for the price level into the
aggregate demand equation, y = m – p, yields
(2) s + l = m – [(1 – )l – s]/(1 – ).
Collecting the terms in l leaves us with
(3) l + [(1 – )l/(1 – )] = m + [s/(1 – )] – s.
Obtaining a common denominator and simplifying gives us
(4) [(1 – ) + (1 – )]l/(1 – ) = m + [1 – (1 – )]s/(1 – ),
or
(5) (1 – )l/(1 – ) = m + [s/(1 – )],
and thus finally, employment is given by
(1 )m s
(6) .
(1 )
Simplifying gives us
(1 )(1 )m (1 )s (1 )s (1 )(1 )m (1 )s
(8) p .
(1 )(1 ) (1 )(1 )
Thus, the aggregate price level is given by
(1 ) m s
(9) p .
(1 )
Substituting equation (6) into the aggregate output equation, y = s + l, and simplifying yields
(1 )m s s s (1 )m s
(10) y s .
(1 ) (1 )
And therefore, output is given by
s (1 )m
(11) y .
(1 )
Finally, to get an expression for the nominal wage, substitute equation (9) into w = p:
(1 ) m s
(12) w .
(1 )
The next step is to see the way in which the degree of indexation affects the responsiveness of
employment to monetary shocks. First, use equation (6) to find how employment varies with m:
(1 )m s
(13) .
m (1 )
Taking the derivative of both sides of equation (13) with respect to gives us
m (1)[1 ] (1 )() ( 1)
(14) 0.
(1 ) 2
(1 ) 2
Thus an increase in the degree of indexation, , reduces the amount that employment will change due to a
given monetary shock.
The next step is to examine the way in which the degree of indexation affects the responsiveness of
employment to supply shocks. First, use equation (6) to find how employment varies with s:
(15) .
s (1 )
Taking the derivative of both sides of equation (15) with respect to gives us
s (1)[1 ] ()() 1
(16) 0.
(1 ) 2 (1 ) 2
Thus an increase in the degree of wage indexation, , increases the amount that employment will change
due to a given supply shock.
where we have used the fact that m and s are independent random variables with variances V m and Vs.
We need to find the value of that minimizes this variance of employment. The first-order condition for
this minimization is
V (1 ) ( 1) 1
(18) 2 Vm 2 Vs 0 .
(1 ) (1 ) 2 (1 ) (1 ) 2
Equation (18) simplifies to
(19) 0 = (1 – )( – 1)Vm + Vs.
Collecting the terms in gives us
(20) [(1 – )Vm + Vs ] = (1 – )Vm .
Thus the optimal degree of wage indexation is
(1 )Vm
(21)
(1 )Vm Vs
Given the result in part (a) – that indexation reduces the impact on employment of monetary shocks but
increases the impact from supply shocks – equation (21) is intuitive. First, if Vs = 0 – so that there are no
supply shocks – the optimal degree of indexation is one. In addition, the larger is the variance of the
supply shocks relative to the variance of the monetary shocks, the lower is the optimal degree of
indexation.
(c) (ii) From equation (28), the variance of employment at firm i is given by
2 2
(1 ) ( i )(1 ) ( i )
(29) Var ( i ) Vm Vs .
(1 ) (1 )
The first-order condition for the value of the degree of wage indexation at firm i, i , that minimizes the
variance of employment at firm i is
Var ( i ) (1 ) ( i )(1 ) ( i )
(30) 2 (1 )Vm 2 Vs 0 .
i (1 ) (1 )
Equation (30) simplifies to
Solutions to Chapter 6 6-21
(31) {(1 – ) – i[(1 – )] + (1 – )}(1 – )Vm = ( + i – )Vs ,
which implies
(32) i2 Vs + i[(1 – )]2 Vm = [(1 – ) + (1 – )](1 – )Vm – ( – )Vs .
Thus i is given by
[(1 ) (1 )](1 )Vm [( )]Vs
(33) i .
2 Vs [ (1 )]2 Vm
(c) (iii) We need to find a value of such that the first-order condition given by equation (31) holds
when i = . That is, we need to find a value of such that if economy-wide indexation is given by , the
representative firm, in order to minimize its employment fluctuations, wishes to choose as well.
Setting i = in equation (31) gives us
(34) (1 – )(1 – )Vm = Vs ,
which implies
(35) [Vs + (1 – )Vm ] = (1 – )Vm .
Thus the Nash-equilibrium value of is
(1 )Vm
(36) EQ .
(1 )Vm Vs
This is exactly the same value of we found in part (b); see equation (21). The value of that minimizes
the variance of aggregate fluctuations in employment is also a Nash equilibrium. Given that other firms
are choosing EQ as their degree of wage indexation, it is optimal for any individual firm to choose EQ as
well.
Problem 6.14
(a) We can use the intuitive reasoning employed to explain equation (11.27) in Chapter 11. Consider an
asset that "pays" – c when the individual climbs a palm tree and pays u when an individual trades and
eats another's coconut. Assume that this asset is being priced by risk-neutral investors with required rate
of return equal to r, the individual's discount rate. Since the expected present value of this asset is the
same as the individual's expected value of lifetime utility, the asset must have price VP while the
individual is looking for palm trees and price VC while the individual is looking for other people with
coconuts.
For the asset to be held, it must provide an expected rate of return of r. That is, its dividends per unit
time plus any expected capital gains or losses per unit time, must equal rV P. When the individual is
looking for palm trees, there are no dividends per unit time. There is a probability b per unit time of a
capital "gain" of (VC – VP) – c; if the individual finds a palm tree and climbs it, the difference in the price
of the asset is VC – VP and the asset "pays" – c at that time. Thus we have
(1) rVP = b(VC – VP – c).
(b) The asset must have price VC while the individual is looking for others with coconuts and must
provide an expected rate of return of r. Thus its dividends per unit time plus any expected capital gains
or losses per unit time, must equal rVC. When the individual is looking for others with coconuts, there
are no dividends per unit time. There is a probability aL per unit time of a capital gain of (VP – VC) + u̅;
if the individual finds someone else with a coconut, trades and eats that coconut, the change in the price
of the asset is (VP – VC) and the asset pays u̅ at that time. Thus we have
(2) rVC = aL(VP – VC + u̅).
(d) For a steady state in which L—the total number of people carrying coconuts—is constant, the flows
out of state C must equal the flows into state C. That is, the number of people finding a trading partner
and eating their coconut per unit time must equal the number of people finding and climbing a tree per
unit time.
The number of people leaving state C per unit time is given by the probability of finding a trading
partner, aL, multiplied by the number of people with coconuts and looking for a trading partner, L. The
number of people entering state C per unit time is given by the probability of finding a tree, b, multiplied
by the number of people looking for a tree, (N - L). For a steady state, these two must be equal. That is,
a steady state requires
(11) (aL)L = b(N – L).
Rearranging equation (11), we have the following quadratic equation in L:
(12) aL2 + bL – bN = 0.
Using the quadratic formula gives us
b b 2 4abN b 9b 2 b
(13) L ,
2a 2a a
where we have used the given condition that aN = 2b. Also note that we can ignore the solution with
L = –2b/a < 0.
(e) For such a steady-state equilibrium, the gain to an individual from climbing a tree, V C – VP, which
represents moving from having the value of being in state P to the value of being in state C, must be
greater than or equal to the cost to the individual of climbing the tree, c. That is, for a steady-state
equilibrium where everyone who finds a palm tree actually climbs it, we require
(14) VC – VP c.
Substituting the steady-state value of L = b/a from equation (13) into the expression for V C – VP given in
equation (10), we have
bc ua (b a ) bc bu
(15) VC VP .
r a ( b a ) b r 2b
Solutions to Chapter 6 6-23
(f) The situation in which no one who finds a tree climbs it is a steady-state equilibrium for any c > 0. If
no one else is climbing a tree when they find one, it is optimal for an individual not to climb a tree when
she finds one. If the individual were to climb a tree and pick a coconut, she would lose c units of utility
with no hope of ever trading with someone else. If she does not climb the tree, she loses no utility. Thus
it is optimal not to climb the tree. The decision process is the same for every individual who comes
across a tree. Thus no one climbing a tree, or L = 0, is a steady-state equilibrium for any c > 0. This
implies that for 0 < c b u̅/(r + b), there is more than one steady-state equilibrium. We have shown two:
L = 0 and L = b/a.
In the situation of multiple equilibria, the one with L = b/a involves higher welfare than the one with
L = 0. We have shown that in part (e), with c bu̅ /(r + b), individuals end up gaining utility each time
they climb a tree. That is why they do it. They know that the utility they will eventually receive by
trading their coconut outweighs the cost of climbing the tree to obtain their coconut. Thus the
equilibrium in which people go through a cycle of searching, climbing, searching, trading and eating,
generates positive utility for the individual. In the equilibrium with L = 0, people never achieve any
positive utility since they never trade and obtain the u̅ units of utility from eating another person's
coconut.
Problem 6.15
(a) The individual's problem is to choose labor supply, Li, to maximize expected utility, conditional on
the realization of Pi . Since Li = Yi, the problem is
(1) max E[(Ci (1 / )Yi ) | Pi ]
Yi
Substituting Ci = PiQi /P and Qi = Li gives us
P Y 1
(2) max E i i Yi Pi .
Yi P
Since only P is uncertain, this can be rewritten as
(3) max EPi P Pi Yi (1 )Yi .
Yi
The first-order condition is given by
(4) E[(Pi /P)|Pi ] – Yi-1 = 0,
or
(5) Yi-1 = E[(Pi /P)|Pi ].
Thus optimal labor supply is given by
6-24 Solutions to Chapter 6
(6) Yi E(Pi P) Pi
1 ( 1)
.
Taking the log of both sides of equation (6) and defining yi lnYi yields
(7) yi = [1/( – 1)]lnE[(Pi /P)|Pi ].
(b) The amount of labor the individual supplies if she follows the certainty-equivalence rule is given by
(in logs)
(8) l i = [1/( – 1)]E[ln(Pi /P)|Pi ].
Since ln(Pi/P) is a concave function of (Pi/P), by Jensen's inequality lnE[(Pi/P)|Pi] > E[ln(Pi/P)|Pi]. Thus
the amount of labor the individual supplies if she follows the certainty-equivalence rule is less than the
optimal amount derived in part (a).
Problem 6.16
(a) Model (i) is given by
(1) yt = a' z t - 1 + bet + vt .
This model says that only the unexpected component of money, et, affects output. Model (ii) is given by
(2) yt = ' z t - 1 + mt + vt .
This model says that all money matters for output.
Substituting the assumption about monetary policy, mt = c' z t - 1 + et, into equation (2) yields
(3) yt = ' z t - 1 + [c' z t - 1 + et ] + vt ,
and collecting terms in z t - 1 gives us
(4) yt = (' + c') z t - 1 + et + vt .
The models given by equations (1) and (4) cannot be distinguished from one another. Given some a' and
b, ' = a' – c' and = b have the same predictions. Intuitively, it is not possible to separate the direct
effect of the z's on output from any possible indirect effect they may have through monetary policy. So it
could be the case that only unexpected money matters and the effect of the z's on output that we observe
is simply their direct effect. However, it could also be the case that the expected component of money
affects output and thus the effect of the z's that we observe consists of both the direct and indirect effects.
Solutions to Chapter 6 6-25
(b) Substituting the new assumption about monetary policy, mt = c' zt-1 + ' wt-1 + et , into model (ii)
yields
(5) yt = ' z t - 1 + [c' z t - 1 + ' wt-1 + et ] + vt ,
or collecting the zt-1 terms gives us
(6) yt = (' + c') z t - 1 + ' wt-1 + et + vt .
In this case, it is possible to distinguish between the two theories. Model (i), only unexpected money
matters, predicts that the coefficients on the w's should be zero. Model (ii), all money matters, does not
predict this. Intuitively, since the w's do not directly affect output, if they are correlated with output it
must be due to their indirect effect through their impact on the money supply.
Problem 6.17
(a) Substitute the aggregate price level, p = qpr + (1 - q)pf , into the expression for the price set by
flexible-price firms, pf = (1 – )p + m, to yield
(1) pf = (1 – )[qpr + (1 – q)pf ] + m.
Solving for pf yields
(2) pf [1 – (1 – )(1 – q)] = (1 – )qpr + m.
Since 1 – (1 – )(1 – q) = q + – q = + (1 – )q, equation (2) can be rewritten as
(3) pf [ + (1 – )q] = (1 – )qpr + m,
and thus finally
(1 )q
(4) p f pr m pr (m p r ) .
(1 )q (1 )q (1 )q
(b) Since rigid-price firms set pr = (1 – )Ep + Em, we need to solve for Ep, the expectation of the
aggregate price level. Taking the expected value of both sides of p = qpr + (1 – q)pf gives us
(5) Ep = qpr + (1 – q)Epf.
Thus we have
(6) pr = (1 – )[qpr + (1 – q)Epf ] + Em.
The rigid-price firms know how the flexible-price firms will set their price. That is, they know that
flexible-price firms will use equation (4) to set their prices. Thus the rational expectation of the price set
by the flexible-price firms is
(7) Epf p r (Em p r ) .
(1 )q
Substituting equation (7) into equation (6) yields
(8) p r (1 )qp r (1 q)p r (Em p r ) Em ,
(1 )q
which implies
(1 )(1 q)
(9) p r (1 )p r Em (Em p r ) .
(1 )q
Defining C [(1 – )(1 – q)]/[ + (1 – )q], we can rewrite equation (9) as
(10) pr = [1 – (1 – ) + C] = ( + C)Em,
or
(11) pr ( + C) = ( + C)Em,
and thus finally
(12) pr = Em.
Rigid-price firms simply set their prices equal to the expected value of the nominal money stock.
6-26 Solutions to Chapter 6
We know that y = m – p. Adding and subtracting Em on the right-hand side of this expression yields
(16) y = Em + (m - Em) – p.
Substituting equation (15) into equation (16) yields
(1 q) (1 )q (1 q)
(17) y (m Em) (m Em) (m Em) ,
(1 )q (1 )q
which simplifies to
(18) y
q
m Em .
(1 )q
(c) (i) From equations (15) and (18), we can see that anticipated changes in m affect only prices.
Specifically, consider the effects of an upward shift in the entire distribution of m, with the realization of
m – Em held fixed. From equation (18) we can see that this will have no effects on real output. In this
case, rigid-price firms get to set their price knowing that m has changed and thus incorporate it into their
price-setting decision.
(c) (ii) Unanticipated changes in m affect real output. That is, a higher value of m given its
distribution—that is, given Em—does raise y as we can see from equation (18). In this case, the rigid-
price firms do not get to observe the higher realization of m and cannot incorporate it into their price-
setting decision and hence the economy does not achieve the flexible-price equilibrium.
In addition, flexible-price firms are reluctant to allow their real prices to change. One can show that
y (1 q)q
(19) m Em .
(1 )q2
Thus a lower value of —a higher degree of "real rigidity"—leads to a higher level of output for any
given positive realization of m – Em. This means that the impact on real output of an unanticipated
increase in aggregate demand is larger the larger is the degree of real rigidity or the more reluctant are
flexible-price firms to allow their real prices to vary.
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the pool. The “herring” had been in, for there was a dead one lying
on the bottom of weed, a golden fish silted over with fine mud.
Suddenly, on chancing to look bay-ward, I saw a small school of
“herring” just off the mouth of the brook and scarce more than fifteen
feet from the motionless rim of the tide. There were, perhaps, fifty or
a hundred fish in the school. Occasional fins chopped the quiet
water. “Herrings” of Eastham brook unable to enter the pond in which
they were born, barred from it by a dam of Nature’s making. As I
stood looking off to the baffled creatures, now huddled and
seemingly still in deeper water, now huddled and all astir in the
shallowest fringes of the tide, I began to reflect on Nature’s
eagerness to sow life everywhere, to fill the planet with it, to crowd
with it the earth, the air, and the seas. Into every empty corner, into
all forgotten things and nooks, Nature struggles to pour life, pouring
life into the dead, life into life itself. That immense, overwhelming,
relentless, burning ardency of Nature for the stir of life! And all these
her creatures, even as these thwarted lives, what travail, what
hunger and cold, what bruising and slow-killing struggle will they not
endure to accomplish the earth’s purpose? and what conscious
resolution of men can equal their impersonal, their congregate will to
yield self life to the will of life universal?
The tide ebbed, swiftly shallowing over the flats, the “herring”
vanished from sight like a reflection from a glass; I could not tell
when they were gone or the manner of their going.
Returning to the outer beach late in the afternoon, I found the
ocean all a cold jade-green sown with whitecaps, the wind rising,
and great broken clouds flowing over from the east. And in this
northern current was a new warmth.
Chapter VIII
NIGHT ON THE GREAT BEACH
I
Our fantastic civilization has fallen out of touch with many aspects
of nature, and with none more completely than with night. Primitive
folk, gathered at a cave mouth round a fire, do not fear night; they
fear, rather, the energies and creatures to whom night gives power;
we of the age of the machines, having delivered ourselves of
nocturnal enemies, now have a dislike of night itself. With lights and
ever more lights, we drive the holiness and beauty of night back to
the forests and the sea; the little villages, the crossroads even, will
have none of it. Are modern folk, perhaps, afraid of night? Do they
fear that vast serenity, the mystery of infinite space, the austerity of
stars? Having made themselves at home in a civilization obsessed
with power, which explains its whole world in terms of energy, do
they fear at night for their dull acquiescence and the pattern of their
beliefs? Be the answer what it will, to-day’s civilization is full of
people who have not the slightest notion of the character or the
poetry of night, who have never even seen night. Yet to live thus, to
know only artificial night, is as absurd and evil as to know only
artificial day.
Night is very beautiful on this great beach. It is the true other half
of the day’s tremendous wheel; no lights without meaning stab or
trouble it; it is beauty, it is fulfilment, it is rest. Thin clouds float in
these heavens, islands of obscurity in a splendour of space and
stars: the Milky Way bridges earth and ocean; the beach resolves
itself into a unity of form, its summer lagoons, its slopes and uplands
merging; against the western sky and the falling bow of sun rise the
silent and superb undulations of the dunes.
My nights are at their darkest when a dense fog streams in from
the sea under a black, unbroken floor of cloud. Such nights are rare,
but are most to be expected when fog gathers off the coast in early
summer; this last Wednesday night was the darkest I have known.
Between ten o’clock and two in the morning three vessels stranded
on the outer beach—a fisherman, a four-masted schooner, and a
beam trawler. The fisherman and the schooner have been towed off,
but the trawler, they say, is still ashore.
I went down to the beach that night just after ten o’clock. So utterly
black, pitch dark it was, and so thick with moisture and trailing
showers, that there was no sign whatever of the beam of Nauset; the
sea was only a sound, and when I reached the edge of the surf the
dunes themselves had disappeared behind. I stood as isolate in that
immensity of rain and night as I might have stood in interplanetary
space. The sea was troubled and noisy, and when I opened the
darkness with an outlined cone of light from my electric torch I saw
that the waves were washing up green coils of sea grass, all coldly
wet and bright in the motionless and unnatural radiance. Far off a
single ship was groaning its way along the shoals. The fog was
compact of the finest moisture; passing by, it spun itself into my lens
of light like a kind of strange, aërial, and liquid silk. Effin Chalke, the
new coast guard, passed me going north, and told me that he had
had news at the halfway house of the schooner at Cahoon’s.
It was dark, pitch dark to my eye, yet complete darkness, I
imagine, is exceedingly rare, perhaps unknown in outer nature. The
nearest natural approximation to it is probably the gloom of forest
country buried in night and cloud. Dark as the night was here, there
was still light on the surface of the planet. Standing on the shelving
beach, with the surf breaking at my feet, I could see the endless wild
uprush, slide, and withdrawal of the sea’s white rim of foam. The
men at Nauset tell me that on such nights they follow along this
vague crawl of whiteness, trusting to habit and a sixth sense to warn
them of their approach to the halfway house.
Animals descend by starlight to the beach. North, beyond the
dunes, muskrats forsake the cliff and nose about in the driftwood and
weed, leaving intricate trails and figure eights to be obliterated by the
day; the lesser folk—the mice, the occasional small sand-coloured
toads, the burrowing moles—keep to the upper beach and leave
their tiny footprints under the overhanging wall. In autumn skunks,
beset by a shrinking larder, go beach combing early in the night. The
animal is by preference a clean feeder and turns up his nose at
rankness. I almost stepped on a big fellow one night as I was
walking north to meet the first man south from Nauset. There was a
scamper, and the creature ran up the beach from under my feet;
alarmed he certainly was, yet was he contained and continent. Deer
are frequently seen, especially north of the light. I find their tracks
upon the summer dunes.
Years ago, while camping on this beach north of Nauset, I went for
a stroll along the top of the cliff at break of dawn. Though the path
followed close enough along the edge, the beach below was often
hidden, and I looked directly from the height to the flush of sunrise at
sea. Presently the path, turning, approached the brink of the earth
precipice, and on the beach below, in the cool, wet rosiness of dawn,
I saw three deer playing. They frolicked, rose on their hind legs,
scampered off, and returned again, and were merry. Just before
sunrise they trotted off north together down the beach toward a
hollow in the cliff and the path that climbs it.
Occasionally a sea creature visits the shore at night. Lone coast
guardsmen, trudging the sand at some deserted hour, have been
startled by seals. One man fell flat on a creature’s back, and it drew
away from under him, flippering toward the sea, with a sound
“halfway between a squeal and a bark.” I myself once had rather a
start. It was long after sundown, the light dying and uncertain, and I
was walking home on the top level of the beach and close along the
slope descending to the ebbing tide. A little more than halfway to the
Fo’castle a huge unexpected something suddenly writhed horribly in
the darkness under my bare foot. I had stepped on a skate left
stranded by some recent crest of surf, and my weight had
momentarily annoyed it back to life.
The Highland Light
Facing north, the beam of Nauset becomes part of the dune night.
As I walk toward it, I see the lantern, now as a star of light which
waxes and wanes three mathematic times, now as a lovely pale flare
of light behind the rounded summits of the dunes. The changes in
the atmosphere change the colour of the beam; it is now whitish,
now flame golden, now golden red; it changes its form as well, from
a star to a blare of light, from a blare of light to a cone of radiance
sweeping a circumference of fog. To the west of Nauset I often see
the apocalyptic flash of the great light at the Highland reflected on
the clouds or even on the moisture in the starlit air, and, seeing it, I
often think of the pleasant hours I have spent there when George
and Mary Smith were at the light and I had the good fortune to visit
as their guest. Instead of going to sleep in the room under the eaves,
I would lie awake, looking out of a window to the great spokes of
light revolving as solemnly as a part of the universe.
All night long the lights of coastwise vessels pass at sea, green
lights going south, red lights moving north. Fishing schooners and
flounder draggers anchor two or three miles out, and keep a bright
riding light burning on the mast. I see them come to anchor at
sundown, but I rarely see them go, for they are off at dawn. When
busy at night, these fishermen illumine their decks with a scatter of
oil flares. From shore, the ships might be thought afire. I have
watched the scene through a night glass. I could see no smoke, only
the waving flares, the reddish radiance on sail and rigging, an edge
of reflection overside, and the enormous night and sea beyond.
One July night, as I returned at three o’clock from an expedition
north, the whole night, in one strange, burning instant, turned into a
phantom day. I stopped and, questioning, stared about. An
enormous meteor, the largest I have ever seen, was consuming itself
in an effulgence of light west of the zenith. Beach and dune and
ocean appeared out of nothing, shadowless and motionless, a
landscape whose every tremor and vibration were stilled, a
landscape in a dream.
The beach at night has a voice all its own, a sound in fullest
harmony with its spirit and mood—with its little, dry noise of sand
forever moving, with its solemn, overspilling, rhythmic seas, with its
eternity of stars that sometimes seem to hang down like lamps from
the high heavens—and that sound the piping of a bird. As I walk the
beach in early summer my solitary coming disturbs it on its nest, and
it flies away, troubled, invisible, piping its sweet, plaintive cry. The
bird I write of is the piping plover, Charadrius melodus, sometimes
called the beach plover or the mourning bird. Its note is a whistled
syllable, the loveliest musical note, I think, sounded by any North
Atlantic bird.
Now that summer is here I often cook myself a camp supper on
the beach. Beyond the crackling, salt-yellow driftwood flame, over
the pyramid of barrel staves, broken boards, and old sticks all atwist
with climbing fire, the unseen ocean thunders and booms, the
breaker sounding hollow as it falls. The wall of the sand cliff behind,
with its rim of grass and withering roots, its sandy crumblings and
erosions, stands gilded with flame; wind cries over it; a covey of
sandpipers pass between the ocean and the fire. There are stars,
and to the south Scorpio hangs curving down the sky with ringed
Saturn shining in his claw.
Learn to reverence night and to put away the vulgar fear of it, for,
with the banishment of night from the experience of man, there
vanishes as well a religious emotion, a poetic mood, which gives
depth to the adventure of humanity. By day, space is one with the
earth and with man—it is his sun that is shining, his clouds that are
floating past; at night, space is his no more. When the great earth,
abandoning day, rolls up the deeps of the heavens and the universe,
a new door opens for the human spirit, and there are few so
clownish that some awareness of the mystery of being does not
touch them as they gaze. For a moment of night we have a glimpse
of ourselves and of our world islanded in its stream of stars—pilgrims
of mortality, voyaging between horizons across eternal seas of space
and time. Fugitive though the instant be, the spirit of man is, during
it, ennobled by a genuine moment of emotional dignity, and poetry
makes its own both the human spirit and experience.
II
At intervals during the summer, often enough when the tides are
high and the moon is near the full, the surf along the beach turns
from a churn of empty moonlit water to a mass of panic life. Driven in
by schools of larger fish, swarms of little fish enter the tumble of the
surf, the eaters follow them, the surf catches them both up and
throws them, mauled and confused, ashore.
Under a sailing moon, the whole churn of sea close off the beach
vibrates with a primeval ferocity and intensity of life; yet is this war of
rushing mouth and living food without a sound save for the breaking
of the seas. But let me tell of such a night.
I had spent an afternoon ashore with friends, and they had driven
me to Nauset Station just after nine o’clock. The moon, two days
from the full, was very lovely on the moors and on the channels and
flat, moon-green isles of the lagoon; the wind was southerly and
light. Moved by its own enormous rhythms, the surf that night was a
stately incoming of high, serried waves, the last wave alone
breaking. This inmost wave broke heavily in a smother and rebound
of sandy foam, and thin sheets of seethe, racing before it up the
beach, vanished endlessly into the endless thirst of the sands. As I
neared the surf rim to begin my walk to the southward, I saw that the
beach close along the breakers, as far as the eye would reach, was
curiously atwinkle in the moonlight with the convulsive dance of
myriads of tiny fish. The breakers were spilling them on the sands;
the surf was aswarm with the creatures; it was indeed, for the time
being, a surf of life. And this surf of life was breaking for miles along
the Cape.
Little herring or mackerel? Sand eels? I picked a dancer out of the
slide and held him up to the moon. It was the familiar sand eel or
sand launce, Ammodytes americanus, of the waters between
Hatteras and Labrador. This is no kin of the true eels, though he
rather resembles one in general appearance, for his body is slender,
eel-like, and round. Instead of ending bluntly, however, this “eel” has
a large, well-forked tail. The fish in the surf were two and three
inches long.
Homeward that night I walked barefooted in the surf, watching the
convulsive, twinkling dance, now and then feeling the squirm of a
fish across my toes. Presently something occurred which made me
keep to the thinnest edge of the foam. Some ten feet ahead, an
enormous dogfish was suddenly borne up the beach on the rim of a
slide of foam; he moved with it unresisting while it carried him; the
slide withdrawing and drying up, it rolled him twice over seaward; he
then twisted heavily, and another minor slide carried him back again
to shore. The fish was about three feet long, a real junior shark,
purplish black in the increasing light—for the moon was moving west
across the long axis of the breakers—and his dark, important bulk
seemed strange in the bright dance of the smaller fish about him.
It was then that I began to look carefully at the width of gathering
seas. Here were the greater fish, the mouths, the eaters who had
driven the “eels” ashore to the edge of their world and into ours. The
surf was alive with dogfish, aswarm with them, with the rush, the cold
bellies, the twist and tear of their wolfish violence of life. Yet there
was but little sign of it in the waters—a rare fin slicing past, and once
the odd and instant glimpse of a fish embedded like a fly in amber in
the bright, overturning volute of a wave.
Too far in, the dogfish were now in the grip of the surf, and
presently began to come ashore. As I walked the next half mile every
other breaker seemed to leave behind its ebb a mauled and
stranded sharklet feebly sculling with his tail. I kicked many back into
the seas, risking a toe, perhaps; some I caught by the tails and flung,
for I did not want them corrupting on the beach. The next morning, in
the mile and three quarters between the Fo’castle and the station, I
counted seventy-one dogfish lying dead on the upper beach. There
were also a dozen or two skates—the skate is really a kind of shark
—which had stranded the same night. Skates follow in many things,
and are forever being flung upon these sands.
I sat up late that night at the Fo’castle, often putting down the book
I read to return to the beach.
A little after eleven came Bill Eldredge to the door, with a grin on
his face and one hand held behind his back. “Have you ordered to-
morrow’s dinner yet?” said he. “No.” “Well, here it is,” and Bill
produced a fine cod from behind his back. “Just found him right in
front of your door, alive and flopping. Yes, yes, haddock and cod
often chase those sand eels in with the bigger fish; often find them
on the beach about this time of the year. Got any place to keep him?
Let me have a piece of string and I’ll hang him on your clothesline.
He’ll keep all right.” With a deft unforking of two fingers, Bill drew the
line through the gills, and as he did so the heavy fish flopped noisily.
No fear about him being dead. Make a nice chowder. Bill stepped
outside; I heard him at the clothesline. Afterward we talked till it was
time for him to shoulder his clock and Coston case again, pick up his
watch cap, whistle in his little black dog, and go down over the dune
to the beach and Nauset Station.
The Sequel of Fog on a Summer Night
There were nights in June when there was phosphorescence in
the surf and on the beach, and one such night I think I shall
remember as the most strange and beautiful of all the year.
Early this summer the middle beach moulded itself into a bar, and
between it and the dunes are long, shallow runnels into which the
ocean spills over at high tide. On the night I write of, the first quarter
of the moon hung in the west, and its light on the sheets of incoming
tide coursing thin across the bar was very beautiful to see. Just after
sundown I walked to Nauset with friends who had been with me
during the afternoon; the tide was still rising, and a current running in
the pools. I lingered at the station with my friends till the last of
sunset had died, and the light upon the planet, which had been
moonlight mingled with sunset pink, had cleared to pure cold moon.
Southward, then, I turned, and because the flooded runnels were
deep close by the station, I could not cross them and had to walk
their inner shores. The tide had fallen half a foot, perhaps, but the
breakers were still leaping up against the bar as against a wall, the
greater ones still spilling over sheets of vanishing foam.
It grew darker with the westing of the moon. There was light on the
western tops of the dunes, a fainter light on the lower beach and the
breakers; the face of the dunes was a unity of dusk.
The tide had ebbed in the pools, and their edges were wet and
dark. There was a strange contrast between the still levels of the
pool and the seethe of the sea. I kept close to the land edge of the
lagoons, and as I advanced my boots kicked wet spatters of sand
ahead as they might have kicked particles of snow. Every spatter
was a crumb of phosphorescence; I walked in a dust of stars. Behind
me, in my footprints, luminous patches burned. With the double-ebb
moonlight and tide, the deepening brims of the pools took shape in
smouldering, wet fire. So strangely did the luminous speckles
smoulder and die and glow that it seemed as if some wind were
passing, by whose breath they were kindled and extinguished.
Occasional whole breakers of phosphorescence rolled in out of the
vague sea—the whole wave one ghostly motion, one creamy light—
and, breaking against the bar, flung up pale sprays of fire.
A strange thing happens here during these luminous tides. The
phosphorescence is itself a mass of life, sometimes protozoan its
origin, sometimes bacterial, the phosphorescence I write of being
probably the latter. Once this living light has seeped into the beach,
colonies of it speedily invade the tissues of the ten thousand
thousand sand fleas which are forever hopping on this edge of
ocean. Within an hour the grey bodies of these swarming
amphipods, these useful, ever hungry sea scavengers (Orchestia
agilis; Talorchestia megalophthalma), show phosphorescent
pinpoints, and these points grow and unite till the whole creature is
luminous. The attack is really a disease, an infection of light. The
process had already begun when I arrived on the beach on the night
of which I am writing, and the luminous fleas hopping off before my
boots were an extraordinary sight. It was curious to see them hop
from the pool rims to the upper beach, paling as they reached the
width of peaceful moonlight lying landward of the strange, crawling
beauty of the pools. This infection kills them, I think; at least, I have
often found the larger creature lying dead on the fringe of the beach,
his huge porcelain eyes and water-grey body one core of living fire.
Round and about him, disregarding, ten thousand kinsmen, carrying
on life and the plan of life, ate of the bounty of the tide.
III
All winter long I slept on a couch in my larger room, but with the
coming of warm weather I have put my bedroom in order—I used it
as a kind of storage space during the cold season—and returned to
my old and rather rusty iron cot. Every once in a while, however,
moved by some obscure mood, I lift off the bedclothing and make up
the couch again for a few nights. I like the seven windows of the
larger room, and the sense one may have there of being almost out-
of-doors. My couch stands alongside the two front windows, and
from my pillow I can look out to sea and watch the passing lights, the
stars rising over ocean, the swaying lanterns of the anchored
fishermen, and the white spill of the surf whose long sound fills the
quiet of the dunes.
Ever since my coming I have wanted to see a thunderstorm bear
down upon this elemental coast. A thunderstorm is a “tempest” on
the Cape. The quoted word, as Shakespeare used it, means
lightning and thunder, and it is in this old and beautiful Elizabethan
sense that the word is used in Eastham. When a schoolboy in the
Orleans or the Wellfleet High reads the Shakespearean play, its title
means to him exactly what it meant to the man from Stratford;
elsewhere in America, the terms seems to mean anything from a
tornado to a blizzard. I imagine that this old significance of the word
is now to be found only in certain parts of England and Cape Cod.
On the night of the June tempest, I was sleeping in my larger
room, the windows were open, and the first low roll of thunder
opened my eyes. It had been very still when I went to bed, but now a
wind from the west-nor’west was blowing through the windows in a
strong and steady current, and as I closed them there was lightning
to the west and far away. I looked at my watch; it was just after one
o’clock. Then came a time of waiting in the darkness, long minutes
broken by more thunder, and intervals of quiet in which I heard a
faintest sound of light surf upon the beach. Suddenly the heavens
cracked open in an immense instant of pinkish-violet lightning. My
seven windows filled with the violent, inhuman light, and I had a
glimpse of the great, solitary dunes staringly empty of familiar
shadows; a tremendous crash then mingled with the withdrawal of
the light, and echoes of thunder rumbled away and grew faint in a
returning rush of darkness. A moment after, rain began to fall gently
as if someone had just released its flow, a blessed sound on a roof
of wooden shingles, and one I have loved ever since I was a child.
From a gentle patter the sound of the rain grew swiftly to a drumming
roar, and with the rain came the chuckling of water from the eaves.
The tempest was crossing the Cape, striking at the ancient land on
its way to the heavens above the sea.
Now came flash after stabbing flash amid a roaring of rain, and
heavy thunder that rolled on till its last echoes were swallowed up in
vast detonations which jarred the walls. Houses were struck that
night in Eastham village. My lonely world, full of lightning and rain,
was strange to look upon. I do not share the usual fear of lightning,
but that night there came over me, for the first and last time of all my
solitary year, a sense of isolation and remoteness from my kind. I
remember that I stood up, watching, in the middle of the room. On
the great marshes the lightning surfaced the winding channels with a
metallic splendour and arrest of motion, all very strange through
windows blurred by rain. Under the violences of light the great dunes
took on a kind of elemental passivity, the quiet of earth enchanted
into stone, and as I watched them appear and plunge back into a
darkness that had an intensity of its own I felt, as never before, a
sense of the vast time, of the thousands of cyclic and uncounted
years which had passed since these giants had risen from the dark
ocean at their feet and given themselves to the wind and the bright
day.
Fantastic things were visible at sea. Beaten down by the rain, and
sheltered by the Cape itself from the river of west wind, the offshore
brim of ocean remained unusually calm. The tide was about halfway
up the beach, and rising, and long parallels of low waves, forming
close inshore, were curling over and breaking placidly along the
lonely, rain-drenched miles. The intense crackling flares and
quiverings of the storm, moving out to sea, illumined every inch of
the beach and the plain of the Atlantic, all save the hollow bellies of
the little breakers, which were shielded from the light by their
overcurling crests. The effect was dramatic and strangely beautiful,
for what one saw was a bright ocean rimmed with parallel bands of
blackest advancing darkness, each one melting back to light as the
wave toppled down upon the beach in foam.
Stars came out after the storm, and when I woke again before
sunrise I found the heavens and the earth rainwashed, cool, and
clear. Saturn and the Scorpion were setting, but Jupiter was riding
the zenith and paling on his throne. The tide was low in the marsh
channels; the gulls had scarcely stirred upon their gravel banks and
bars. Suddenly, thus wandering about, I disturbed a song sparrow on
her nest. She flew to the roof of my house, grasped the ridgepole,
and turned about, apprehensive, inquiring ... ’tsiped her
monosyllable of alarm. Then back toward her nest she flew, alighted
in a plum bush, and, reassured at last, trilled out a morning song.
I
Had I room in this book, I should like to write a whole chapter on
the sense of smell, for all my life long I have had of that sense an
individual enjoyment. To my mind, we live too completely by the eye.
I like a good smell—the smell of a freshly ploughed field on a warm
morning after a night of April rain, the clovelike aroma of our wild
Cape Cod pinks, the morning perfume of lilacs showery with dew,
the good reek of hot salt grass and low tide blowing from these
meadows late on summer afternoons.
What a stench modern civilization breathes, and how have we
ever learned to endure that foul blue air? In the Seventeenth
Century, the air about a city must have been much the same air as
overhung a large village; to-day the town atmosphere is to be
endured only by the new synthetic man.
Our whole English tradition neglects smell. In English, the nose is
still something of an indelicate organ, and I am not so sure that its
use is not regarded as somewhat sensual. Our literary pictures, our
poetic landscapes are things to hang on the mind’s wall, things for
the eye. French letters are more indulgent to the nose; one can
scarcely read ten lines of any French verse without encountering the
omnipresent, the inevitable parfum. And here the French are right,
for though the eye is the human master sense and chief æsthetic
gate, the creation of a mood or of a moment of earth poetry is a rite
for which other senses may be properly invoked. Of all such appeals
to sensory recollection, none are more powerful, none open a wider
door in the brain than an appeal to the nose. It is a sense that every
lover of the elemental world ought to use, and, using, enjoy. We
ought to keep all senses vibrant and alive. Had we done so, we
should never have built a civilization which outrages them, which so
outrages them, indeed, that a vicious circle has been established
and the dull sense grown duller.
One reason for my love of this great beach is that, living here, I
dwell in a world that has a good natural smell, that is full of keen,
vivid, and interesting savours and fragrances. I have them at their
best, perhaps, when hot days are dulled with a warm rain. So well do
I know them, indeed, that were I blindfolded and led about the
summer beach, I think I could tell on what part of it I was at any
moment standing. At the ocean’s very edge the air is almost always
cool—cold even—and delicately moist with surf spray and the
endless dissolution of the innumerable bubbles of the foam slides;
the wet sand slope beneath exhales a cool savour of mingling beach
and sea, and the innermost breakers push ahead of them puffs of
this fragrant air. It is a singular experience to walk this brim of ocean
when the wind is blowing almost directly down the beach, but now
veering a point toward the dunes, now a point toward the sea. For
twenty feet a humid and tropical exhalation of hot, wet sand encircles
one, and from this one steps, as through a door, into as many yards
of mid-September. In a point of time, one goes from Central America
to Maine.
Atop the broad eight-foot back of the summer bar, inland forty feet
or so from the edge of low tide, other odours wait. Here have the
tides strewn a moist tableland with lumpy tangles, wisps, and matted
festoons of ocean vegetation—with common sea grass, with
rockweed olive-green and rockweed olive-brown, with the crushed
and wrinkled green leaves of sea lettuce, with edible, purple-red
dulse and bleached sea moss, with slimy and gelatinous cords
seven and eight feet long. In the hot noontide they lie, slowly, slowly
withering—for their very substance is water—and sending an odour
of ocean and vegetation into the burning air. I like this good natural
savour. Sometimes a dead, surf-trapped fish, perhaps a dead skate
curling up in the heat, adds to this odour of vegetation a faint fishy
rankness, but the smell is not earth corruption, and the scavengers
of the beach soon enough remove the cause.
Beyond the bar and the tidal runnel farther in, the flat region I call
the upper beach runs back to the shadeless bastion of the dunes. In
summer this beach is rarely covered by the tides. Here lies a hot and
pleasant odour of sand. I find myself an angle of shade slanting off
from a mass of wreckage still embedded in a dune, take up a handful
of the dry, bright sand, sift it slowly through my fingers, and note how
the heat brings out the fine, sharp, stony smell of it. There is weed
here, too, well buried in the dry sand—flotsam of last month’s high,
full-moon tides. In the shadowless glare, the topmost fronds and
heart-shaped air sacs have ripened to an odd iodine orange and a
blackish iodine brown. Overwhelmed thus by sand and heat, the
aroma of this foliage has dissolved; only a shower will summon it
again from these crisping, strangely coloured leaves.
Nesting Tern
Cool breath of eastern ocean, the aroma of beach vegetation in
the sun, the hot, pungent exhalation of fine sand—these mingled are
the midsummer savour of the beach.
II
In my open, treeless world, the year is at flood tide. All day long
and all night long, for four days and five days, the southwest wind
blows across the Cape with the tireless constancy of a planetary
river. The sun, descending the altar of the year, pauses ritually on
the steps of the summer months, the disk of flame overflowing. On
hot days the beach is tremulous with rising, visible heat bent
seaward by the wind; a blue haze hangs inland over the moors and
the great marsh blotting out pictorial individualities and reducing the
landscape to a mass. Dune days are sometimes hotter than village
days, for the naked glare of sand reflects the heat; dune nights are
always cooler. On its sun-trodden sand, between the marsh wind
and the coolness of ocean, the Fo’castle has been as comfortable as
a ship at sea.
The duneland air burns with the smell of sand, ocean, and sun. On
the tops of the hills, the grass stands at its tallest and greenest, its
new straw-green seed plumes rising through a dead crop of last
year’s withered spears. On some leaves there is already a tiny spot
of orange wither at the very tip, and thin lines of wither descending
on either edge. Grasses in the salt meadows are fruiting; there are
brownish and greenish-yellow patches on the levels of summer
green. On the dunes, the sand lies quiescent in a tangle of grass; in
naked places, it lies as if it were held down by the sun. When there
has been no rain for a week or more, and the slanting flame has
been heavy on the beach, the sand in my path down Fo’castle dune
becomes so dry, so loose and deep, that I trudge through it as
through snow.
The winter sea was a mirror in a cold, half-lighted room, the
summer sea is a mirror in a room burning with light. So abundant is
the light and so huge the mirror that the whole of a summer day
floats reflected on the glass. Colours gather there, sunrise and
twilight, cloud shadows and cloud reflections, the pewter dullness of
gathering rain, the blue, burning splendour of space swept free of
every cloud. Light transfixes ocean, and some warmth steals in with
the light, but the waves that glint in the sun are still a tingling cold.
Now do insects inherit the warm earth. When a sluggish wind
blows from the marsh on a hot day, the dunes can be tropical. The
sand quivers with insect lives. On such days, “greenheads,” Tabanus
costalis, stab and buzz, sand gnats or “no-see-ums” gather in
myriads on the sun-drenched south wall of the house, “flatiron flies”
and minor unknowns swarm to the attack. One must remain indoors
or take a precarious refuge at the ocean’s very edge. Thanks to the
wind, the coolness, and the spray, the lower beach is usually free of
insect bloodletters, though the bullying, poisonous Tabanid, in the
mid-August height of his season, can be a hateful nuisance. So far,
however, I have had but two of these tropical visitations. Barring an
extra allowance of greenheads, the dunes are probably quite as
habitable as any stretch of outermost beach. The wind, moreover,
saves me from mosquitoes.
Ants have appeared, and the upper beach is pitted with their hills; I
watch the tiny, red-brown creatures running in and out of buried
weed. Just outside each hole, the fine sand is all delicately ascrawl
with the small, endless comings and goings. The whole upper beach,
indeed, has become a plain of intense and minute life; there are
tunnels and doors and pitways everywhere. The dune locusts that
were so small in June have grown large and learned to make a
sound. All up and down the dunes, sometimes swept seaward out of
their course by the west wind, go various butterflies. When I turn up
driftwood in the dunes, or walk the wheel ruts in the meadows,
crickets race off into the grass.
On the dunes, in open places near thin grass, I find the deep,
finger-round mine shafts of the dune spider. A foot below, in the
cooler sand, lives the black female; dig her up, and you will find a
hairy, spidery ball. During the summer months the lady does not
leave her cave, but in early autumn she revisits the world and
scuttles through the dune grass, black, fast, and formidable. The
smaller, sand-coloured male runs about everywhere. I saw one on
the beach the other night, running along in cloudy moonlight, and
mistook him at first for a small crab. Later the same night, I found a
tiny, sand-coloured dune toad at the very brim of the surf, and
wondered if an appetite for beach fleas had led him there.
“June bugs,” Lachnosterna arcuata, strike my screens with a
formidable boom and linger there formidably buzzing; let me but
open the door, and half a dozen are tilting at my table lamp and
falling stunned upon the cloth. On mounded slopes of sand, solitary
black wasps scratch themselves out a cave; across my paths move
the shadows of giant dragon flies.
The straggling beach peas of the region are in bloom; the west
wind blows the grass and rushes out to the rippled levels of a level
sea; heat clouds hang motionless on the land horizon, their lower
rims lost in the general haze; the great sun overflows; the year burns
on.
III
I have spoken in another chapter of the melting away of bird life
from this region during April and May. There was a time when the all-
the-year-round herring gulls seemed the only birds left to me, and
many of these were immature birds or birds whose plumage was
then changing from immature brown to adult white and grey. One
cold, foggy morning late in May, I woke to find the beach in front of
the Fo’castle crowded with these gulls, for a number of hake had
stranded during the night, and the birds had discovered them and
come to feed. Some fed on the fresh fish, findings being keepings—I
saw various birds defend their individual repasts from late arrivals
and would-be sharers with a show of wings and a hostile cry—others
stood on the top of the beach in a long, senatorial row facing the
sea. The maturing birds were of all tones of white and brown; some
were chalky and brown, some were speckled like hens, others were
a curious brown-mottled chalky grey. The moults of herring gulls are
complicated affairs. There are spring moults and autumn moults,
partial moults and second nuptial plumages. Not until the third year
or later does the bird seem to assume its full nuptial and adult
coloration.
When I first open my eyes on a bright midsummer morning, the
first sound that becomes part of my waking consciousness is the
recurrent rush and spill of the summer sea; then do I hear a patter of
tiny feet on the roof over my head and the cheerful notes of a song
sparrow’s home-spun tune. These sparrows are the songbirds of the
dunes. I hear them all day long, for I have a pair nesting on the
seaward slope of this dune in a clump of dusty miller. My building of