Principles of Macroeconomics 6th

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Principles of Macroeconomics 6th Edition Mankiw Solutions Manual

2 THINKING LIKE AN ECONOMIST

WHAT’S NEW IN THE SIXTH EDITION:

There are some updates to the FYI on Who Studies Economics? There is a new In the News on “The
Economics of President Obama.” Table 1 has been updated and expanded.

LEARNING OBJECTIVES:

By the end of this chapter, students should understand:

how economists apply the methods of science.

how assumptions and models can shed light on the world.

two simple models—the circular flow and the production possibilities frontier.

the difference between microeconomics and macroeconomics.

the difference between positive and normative statements.

the role of economists in making policy.

why economists sometimes disagree with one another.

CONTEXT AND PURPOSE:

Chapter 2 is the second chapter in a three chapter section that serves as the introduction of the text.
Chapter 1 introduced ten principles of economics that will be revisited throughout the text. Chapter 2
develops how economists approach problems while Chapter 3 will explain how individuals and countries
gain from trade.
The purpose of Chapter 2 is to familiarize students with how economists approach economic
problems. With practice, they will learn how to approach similar problems in this dispassionate systematic
way. They will see how economists employ the scientific method, the role of assumptions in model
building, and the application of two specific economic models. Students will also learn the important
distinction between two roles economists can play: as scientists when we try to explain the economic
world and as policymakers when we try to improve it.

15
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16 ❖ Chapter 2/Thinking Like an Economist

KEY POINTS:

 Economists try to address their subject with a scientist’s objectivity. Like all scientists, they make
appropriate assumptions and build simplified models in order to understand the world around them.
Two simple economic models are the circular-flow diagram and the production possibilities frontier.

 The field of economics is divided into two subfields: microeconomics and macroeconomics.
Microeconomists study decisionmaking by households and firms and the interaction among
households and firms in the marketplace. Macroeconomists study the forces and trends that affect
the economy as a whole.

 A positive statement is an assertion about how the world is. A normative statement is an assertion
about how the world ought to be. When economists make normative statements, they are acting
more as policy advisers than scientists.

 Economists who advise policymakers offer conflicting advice either because of differences in scientific
judgments or because of differences in values. At other times, economists are united in the advice
they offer, but policymakers may choose to ignore it.

CHAPTER OUTLINE:

I. The Economist as Scientist

A. Economists Follow the Scientific Method.

1. Observations help us to develop theory.

2. Data can be collected and analyzed to evaluate theories.

3. Using data to evaluate theories is more difficult in economics than in physical science
because economists are unable to generate their own data and must make do with whatever
data are available.

4. Thus, economists pay close attention to the natural experiments offered by history.

B. Assumptions Make the World Easier to Understand.

1. Example: to understand international trade, it may be helpful to start out assuming that
there are only two countries in the world producing only two goods. Once we understand
how trade would work between these two countries, we can extend our analysis to a greater
number of countries and goods.

2. One important role of a scientist is to understand which assumptions one should make.

3. Economists often use assumptions that are somewhat unrealistic but will have small effects
on the actual outcome of the answer.

C. Economists Use Economic Models to Explain the World Around Us.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 2/Thinking Like an Economist ❖ 17

To illustrate to the class how simple but unrealistic models can be useful, bring a
road map to class. Point out how unrealistic it is. For example, it does not show
where all of the stop signs, gas stations, or restaurants are located. It assumes that
the earth is flat and two-dimensional. But, despite these simplifications, a map
usually helps travelers get from one place to another. Thus, it is a good model.

1. Most economic models are composed of diagrams and equations.

2. The goal of a model is to simplify reality in order to increase our understanding. This is
where the use of assumptions is helpful.

D. Our First Model: The Circular Flow Diagram

Figure 1

1. Definition of circular-flow diagram: a visual model of the economy that shows how
dollars flow through markets among households and firms.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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 This discovery increased the mystery. Yet it was plain that he was
acting according to his promise, and was leaving no effort untried in
order to solve the problem. But why? What possible interest could he
have in discovering the truth regarding Reggie's assassination?

Certainly his appearance was greatly altered. Instead of the unkempt,

shuffling Italian whom I had visited in the Via Magenta, in Leghorn, he
was spruce, well-shaven, and smartly dressed, although his dwarfed and
slightly deformed personality could not be disguised.

The look upon his countenance was the reverse of reassuring. Ugly
even when smiling, his face was distorted by rage, and absolutely
forbidding, as he walked hurriedly past within half-a-dozen feet of me,
and away towards the exit from the garden. The insult he had sustained
was one which angered him terribly, and if ever vengeance was written
upon a man's face it was written upon his.

The queer old fellow had puzzled me greatly ever since that eventful
evening at Leghorn. To me there was such an absence of motive that his
actions were doubly remarkable. And yet I could never get away from
the fact that he knew of old Keppel's intention to go to Ragusa before it
had been announced to us; and he was also well acquainted with all the
facts of poor Reggie's tragic end, and the subsequent action on the part of
both the police and myself. Besides, he had told me of Ernest's
whereabouts, of which I was in ignorance, and now it appeared that he
had been, until a moment ago, on friendly terms with the woman who
had robbed me of the one man who in all the world was dear to me.

Utterly dumbfounded by his presence there, I watched him walk

down the long gravelled path beside the lake, past the landing-stage, and
out towards the public road. Indeed, I think I was too astonished at that
moment to rise and follow the man who had declared our interests to be
identical.

I turned and glanced across at the woman. She had risen, shaken out
her skirts, and hastily drawn her light cape about her shoulders, as for a
moment she stood in hesitation, looking after her companion.

Her brow was knit, and I seemed to watch determination becoming

more and more strongly marked upon her face. Then she hurried quickly
after him.
 I rose, too, but a thought flashed across my mind. He had not
gathered up the fragments of the letter before leaving. They were, no
doubt, still there. What could the letter contain that it should so incense
her?

Without hesitation I moved across to the table so lately occupied, and

there saw scattered on the ground in the vicinity several pieces of torn
paper, which I gathered swiftly into my hand. They were portions of a
letter written on white-edged, smoke-grey paper of a fashionable pattern.
Fortunately, no waiters were in the near neighbourhood, and I was
enabled to continue my search, for any stray scraps might, I reflected, be
of importance. After I had picked up a piece that had been blown some
distance off, I placed all the fragments carefully in my pocket, and made
my way toward the brightly-lit entrance.

As there were no cabs, I was compelled to walk to the station, which

occupied me quite a quarter of an hour. It appeared certain that both the
man and the woman would return to Paris, and that the woman hoped to
meet Branca at the railway-station.

When I arrived, however, I found that the train had just departed for
the Gare du Nord, and that there was not another for nearly an hour. If
they had both left by the train I had so narrowly missed, then they had
successfully escaped me.

The bare salle d'attente at Enghien is not a cheerful place at night,

when the single gas jet is turned low, and the doors leading out upon the
platform are securely locked. Here, again, I was confronted by a
difficulty, namely, that if, perchance, the pair had not caught the train,
they would probably enter the waiting room. To remain there was
manifestly dangerous, if I did not wish my identity to be revealed.

My chief regret was that I had missed Branca. I had no means of

communicating with him, for I had no idea where he was staying, and he
certainly did not know my address, or else he would have sent me word
that he was in Paris. All I could hope was that the woman had caught
him up and detained him, and that they would return together by the next
train.

Deciding that to rest in the waiting-room was injudicious, I went out

and crossed to the little café opposite, where the tables on the pavement
were shaded by a row of laurels in tubs, in the usual French style. I
wished to piece together the precious letter in my pocket without being
observed. I entered the place and sat down. A consumptive waiter and a
fat woman presiding over the bottles on the small counter were the only
occupants, and after ordering a "limonade," I drew forth scrap after scrap
of the torn letter and spread it out upon the table.

It was written in French, in a feminine hand, but it was some time

before I could piece the fragments together so as to read the whole. At
last I succeeded, and discovered it to be dated from the "Grand Hotel" at
Brussels. It ran as follows:

"My dear Laumont,—See Julie the instant she returns from Moscow,
and warn her. Someone has turned traitor. Tell her to be extremely
careful, and to lie low for the present. If she does not, she will place us
all in jeopardy. Advise her to go to London. She would be safe there. So
would you. Bury yourselves.—Hastily, your friend, "SIDONIE."

Laumont! Who, I wondered, was Laumont?

Was it possible that the woman referred to as Julie was actually the
person who had so fascinated Ernest? If so, the warning was a strange
one; and she had disregarded it by tearing up the letter and casting it into
Branca's face.

"Bury yourselves." The injunction was expressive, to say the least of

it. Some person unknown had turned traitor, and had told the truth
regarding some matter which had apparently been a secret. The letter
was a mysterious one, from every point of view.

A dozen times I read it through, then carefully collected the scraps

and replaced them in my pocket.

The person to whom the letter was addressed was, without doubt, an
accomplice of the woman Julie, while their correspondent, who was
named Sidonie, and who stayed at the "Grand Hotel" in Brussels, was
anxious that both should escape to London. The woman Julie had been in
Moscow. Was it possible that this woman who had attracted Ernest had
during my absence in the Mediterranean been in Russia? Perhaps she
had.

Yet I had no ground whatever for believing the woman whom I had
seen at Monte Carlo, and had so recently followed from Paris, to be
named Julie. My suspicions might, for aught I knew, be entirely
groundless.

From where I sat I could watch all persons entering the station, but
my heart sank within me when at length it was time for me to cross to
take the train for Paris, for my search along the platform was a fruitless
one.

Both had evidently left by the earlier train, and the absence of a
fiacre at the door of the Casino had caused me to lose sight of them.

Alone in the dimly-lit railway compartment, as the train passed

through the suburb of St. Denis and on to the Gare du Nord, I reflected
deeply. My brain was awhirl with the events which had occurred so
rapidly since landing at Leghorn. I knew not whether Captain Davis had
received my telegram and had left for Genoa, or whether the message
had been delayed until he had received that package which was destined
to send the Vispera to the bottom.

On every side I saw plot and counterplot, the most dastardly of them
all being the determination of Keppel to destroy his yacht. And Ulrica?
What of her? That she was on board was almost certain; she might even
then be sailing southward to her doom.

Yet I had warned her, and I hoped that she had come ashore as we
had arranged. The only possibility I feared was a disinclination upon her
part to offend the old millionaire. If she found the course altered to
Genoa, a change which I had endeavoured to effect by my telegram, she
might possibly have gone on there. All that I prayed for was that my wire
had reached Davis's hand before the package supposed to contain the
statuette.

Keppel at that moment no doubt believed the Vispera to have gone

down, and was prepared for the receipt of the astounding news from one
or other of the Mediterranean ports. Possibly he believed that he had a
perfect answer to the question as to why he had left the vessel, but to me
it seemed as though he would meet with considerable difficulty, if the
worst had really happened.

There might, too, be a survivor, and a survivor's testimony in such a

case would be awkward.

As the train, with its impériales, or seats above the third-class

carriages, rushed on toward Paris, I pondered, too, upon Branca's sudden
reappearance. There was something uncanny about the fellow. His
knowledge was as extensive as his cunning was low and ingenious.

For what reason, I wondered, had he met that tow-haired woman who
had been Ernest Cameron's good genius at Monte Carlo? Why, too, had
she taken the trouble to go out to Enghien for the purpose of seeing him?

One theory alone took possession of my mind, namely, that there was
a secret between them. Possibly he had been acquainted with her; they
might even have been friends. But it was quite evident that they had
quarrelled, and he had been gravely offended by the insult offered him.

Each night-train from Enghien to the Gare du Nord always brought

home a large number of returning gamblers and pleasure-seekers, so
when we came to a standstill, the quai quickly became crowded by
persons whom I had noticed strolling in the Casino. In vain, however, I
searched for the pair whose movements I had been watching. I was
compelled to acknowledge myself baffled, and to take a fiacre back to
the "Hôtel Terminus."

Fearing lest any of the trio might be lounging at the café in front of
the hotel, where arriving cabs file slowly past, I dismissed the vehicle at
the corner of the Rue du Havre, and approached the hotel on the opposite
side of the way.

One of my chief difficulties was the entering and leaving the hotel,
for I never knew whom I might meet. I had had several narrow escapes
from recognition, notwithstanding every possible precaution.

At last, however, after carefully examining all who were lounging

about the entrance, I managed to slip in, passing the big-moustached
concierge, and ascending by the lift to my own room, utterly worn out by
anxiety and fatigue.

CHAPTER XXVI

GIVES THE KEY TO THE CIPHER

Even though tired out, I slept but little that night. I tried, times
without number, but in vain, to solve the secret of that cipher message—
or warning, was it?—written upon the table before the "Grand Café." But
neither the initial nor the word "tabac" conveyed to me any meaning
whatever. One fact seemed particularly strange, namely, the reason why
the ragged collector of cigar-ends should have searched for it; and,
further, why the word written there should have been "tabac." Again,
who was the shabby, wizen-faced individual who had watched that table
with such eagerness and expectancy?

As I reflected, I became impressed by the idea that the table itself

was one of those known to be a notice-board of criminals, and therefore
at night it was watched by the police.

The great Goron, that past-master in the detection of crime, had, I

remembered, told me that in all the quarters of Paris, from the chic
Avenue des Champs Elysées to the lower parts of Montmartre, there
were certain tables at certain cafés used by thieves, burglars, and other
such gentry, for the exchange of messages, the dissemination of news,
and the issue of warnings. Indeed, the correspondence on the café tables
was found to be more rapid, far more secret, and likely to attract less
notice than the insertion of paragraphs in the advertisement columns of
the newspapers. Each gang of malefactors had, he told me, its own
particular table in its own particular café, where any member could sit
and read at his leisure the cipher notice, or warning, placed there,
without risking direct communication with his associates in rascality.

Had the man whom I had so fondly loved actually allied himself with
some criminal band, that he knew their means of communication, and
was in possession of their cipher? It certainly seemed as though he had.
But that was one of the points I intended to clear up before denouncing
him to the police.

Next morning I rose early, eager for activity, but there seemed no
movement in the room adjoining mine. All three took their coffee in their
bedrooms, and it was not till nearly eleven o'clock that I heard Keppel in
conversation with the mysterious woman who had been my travelling
companion.

"Ernest is running a great risk," he was saying. "It's quite

unnecessary, to my mind. The police are everywhere on the alert, for
word has, of course, come from Nice. If he is unfortunate enough to fall
into their hands, he'll only have himself to blame."

"But surely you don't anticipate such a thing?" she asked, in genuine
alarm.

"Well, he goes about quite openly, well knowing that his description
has been circulated through every town and village in France."

"And if he were arrested, where should he be?" inquired the woman,

in dismay.

"In a very awkward predicament, I fear," he responded. "That's the

very reason why I'm trying to persuade Cameron to act with greater
discretion. He's well known, you see, and may be recognised at any
moment in the street. If he were a stranger here, in Paris, it might be
different."

"It's certainly ridiculous for him to run his head into a noose. I must
speak to him at once."

"He's out. He went out before six this morning, the chambermaid
tells me."

"That's odd! Where's he gone?"

"I don't exactly know. Somewhere in the country, I should think."

"What if he is already arrested?"

 "No, don't let's anticipate such a contretemps. Matters are, however,
beginning to look serious enough, in all conscience," he answered.

"Do you think we shall succeed?" she inquired eagerly.

"We have been successful before," he responded confidently. "Why

not now? We have only to exercise just a little more care and cunning
than that exercised by the police. Then, once beyond suspicion, all the
rest is perfectly plain sailing."

"Which means that we must make a perfect coup."

"Exactly. The whole scheme must be carried out firmly and without a
hitch, otherwise we shall find ourselves in very hot water."

"Knowing this should make us desperate," she observed.

"I'm desperate already," he replied, in a quiet voice. "It will not go

well with anyone who tries to thwart us now. It's a matter of life or
death."

What new plot had been hatched I could not guess. What was this
fresh conspiracy that was intended? His carefully-guarded words awoke
in me an intense curiosity. I had already overheard many things, and still
resolved to possess myself in patience, and to continue my ever-watchful
vigil. There was, according to the old man's own words, a desperate plot
in progress, which the conspirators were determined to carry out at all
hazards, even up to the point of taking another human life.

I wrote down on a piece of paper the cipher which I had found

scrawled upon the table, and tried by several means to reduce it to some
intelligible message, but without success. It was evidently in one of those
secret codes used by criminals, and therefore I had but a remote chance
of discovering a key to what so often had puzzled the cleverest detectives
of the sûreté.

The day passed without any important incident. I remained in my

room awaiting the return of the man whose strange action had puzzled
me on the previous night, and who was now running such risk of arrest.
If he returned, I hoped to overhear his conversation with his companions;
but unfortunately he did not come back. All was quiet in the adjoining
chamber, for Keppel and the woman with the strange marks had
evidently gone out in company.

About seven o'clock I myself dressed and went forth, strolling idly
along until I stood on the pavement at the corner of the Boulevard des
Italiens, in front of the Opera. There are always many idlers there,
mostly sharks on the watch for the unsuspecting foreigner. The English
and American tourist offices are just opposite, and from the corner these
polyglot swindlers can easily fix upon persons who change cheques as
likely victims, and track them down. Suddenly it occurred to me to stroll
along and glance at the table before the "Grand Café." This I did, but
found only the remains of some cipher which had been hastily
obliterated, possibly earlier in the day, for the surface of the marble was
quite dry, and only one or two faint pencil-marks remained.

As I sat there, I chanced to glance across the road, and to my surprise

saw the same shabby, wizen-faced man lounging along the kerb. He was
evidently keeping that table under observation. While pretending not to
see him, I drank my coffee, paid, rose from my seat, and walked away;
but as the watcher at once followed me, I returned to the hotel.

It is not pleasant for a woman to be followed by a strange man,

especially if she is bent upon making secret inquiries, or is watching
another person, so when I had again returned to my room I presently
bethought myself of the second exit from the hotel—the one which leads
straight into the booking-office of the Gare St. Lazare. By means of this
door I managed to escape the little man's vigilance, and entering a cab,
drove down to the Pont des Arts. As I had nothing particular to do, it
occurred to me that if I could find the little coiffeur's, where I had seen
the man with whom I had danced on the night of the Carnival ball, I
might watch, and perhaps learn something. That this man was on
friendly terms with both Keppel and Cameron had been proved by that
scrap of confidential conversation I had chanced to overhear.

The difficulty I experienced in recognising the narrow and crooked

street was considerable, but after nearly an hour's search through the
smaller thoroughfares to the left of the Boulevard St. Michel, my
patience was rewarded, and I slowly passed the little shop on the
opposite side. The place was in darkness, apparently closed. Scarcely
had I passed, however, when someone emerged from the place. It was, I
felt quite sure, the man who had worn the owl's dress. He was dressed
rather elegantly, and seemed to possess quite an air of distinction.
Indeed, no one meeting him in the street would have believed him to be a
barber.

Almost involuntarily, I followed him. He lit a cigarette, and then

walked forward at a rapid pace down the Boulevard, across the Pont
Neuf, and turning through many streets, which were as a bewildering
maze to me, he suddenly tossed his cigarette away, entered a large house,
and made some inquiry of the concierge.

"Madame Fournereau?" I heard the old man answer gruffly. "Yes.

Second floor, on the left."

And the man who had so mysteriously returned to me the stolen

notes went forward, and up the stairs.

Madame Fournereau! I had never, as far as I recollected, heard that

name before.

I strolled along a little farther, hesitating whether to remain there

until the man emerged again, when, as I lifted my eyes, I happened to see
the name-plate at the street corner. It was the Rue du Bac. In an instant
the similarity of the word in the cipher, "tabac" occurred to me. Could it
be that the woman for whom the message was intended lived there?
Could it be that this woman for whose love Ernest had forsaken me was
named Fournereau? I entertained a lively suspicion that I had at last
discovered her name and her abode.

I think at that moment my usual discretion left me utterly. So many

and so strange were the mysteries which had surrounded me during the
past month or so, that I believe my actions were characterised by a
boldness of which no woman in her right senses would have been
capable. Now that I reflect upon it all, I do not think I was in my right
senses that night, or I should not have dared to act alone and unaided as I
did. But the determination to avenge the poor lad's death, and at the same
time to avenge my own wrongs, was strong upon me. A jealous woman
is capable of breaking any of the ten commandments. "Amor dà per
mercede, gelosia e rotta fede."
 Had I remained to reason with myself, I should never have entered
that house, but fired by a determination to seek the truth, and to meet that
woman face to face, I entered boldly and, without a word to the
concierge, passed up to the second floor.

The house was, I discovered, like many in Paris, far more handsome
within than without. The stairs leading to the flats were thickly carpeted
and were illuminated by electricity, though, judging by the exterior, I had
believed it to be a house of quite a fourth-rate class. When I rang at the
door on the left a neat Parisian bonne in a muslin cap answered my
summons.

"Madame Fournereau?" I inquired.

"Oui, madame," answered the woman, as she admitted me to the

narrow but well-furnished entrance-hall. "Madame is expecting you, I
believe. Will you please enter?"

I saw in an instant that I was mistaken for a guest, and quickly made
up my mind to use this mistake to the best possible advantage.

My quick eyes noticed in the hall a number of men's hats and

women's capes. From the room beyond came quite a babel of voices. I
walked forward in wonderment, but next second knew the truth. The
place was a private gambling-house. Madame's guests, a strange and
motley crowd, came there to play games of hazard.

In the room I had entered was a roulette table, smaller than those at
Monte Carlo, and around it were some twenty well-dressed men and
women, all intent upon the game. Notes and gold were lying everywhere
upon the numbers and the single chances, and the fact that no silver was
there was sufficient testimony that high stakes were usual. The air was
close and oppressive, for the windows were closed and heavily curtained,
and above the sound of excited voices rose that well-known cry of the
unhealthy-looking, pimply-faced croupier in crimped shirt front and
greasy black:

"Messieurs, faites vos jeux!"

Advancing to the table, I stood there unnoticed in the crowd. Those

who saw me enter undoubtedly believed me to be a gambler, like
themselves, for it appeared as though madame's guests were drawn from
various classes of society. Although the atmosphere was so stifling, I
managed to remain cool, and affected to be interested in the game by
tossing a louis upon the red.

I won. It is strange that carelessness at roulette invariably brings

good fortune. I glanced about me, eager to discover madame herself, but
saw neither her nor the barber whom I had followed to this place. At the
end of the room there were, however, a pair of long sage-green curtains,
and as one of the players rose from the table and passed between them, I
saw that another gaming-room lay beyond, and that the gamblers were
playing baccarat, the bank being held by a superior-looking old
gentleman who was wearing the crimson ribbon of the Legion d'Honneur
in the lapel of his dining-jacket.

Boldly I went forward into that room, and in an instant saw that I was
not mistaken, for there, chatting to a circle of men and women at the
opposite end of the salon, was the small, fair-haired woman whom I had
seen in Ernest's company at Monte Carlo, and whom I had followed to
Enghien. The man who had given me the stolen notes was standing near
her, listening to her account of a pleasure trip from which she had
apparently only just returned.

A couple of new-comers, well-dressed men, entered, walked straight

up to her, shook hands, and expressed their delight that she had returned
to Paris to resume her entertainments.

"I, too, am glad to return to all my friends, messieurs," she laughed.

"I really found Monte Carlo very dull, after all."

"You were not fortunate? That is to be regretted."

"Ah!" she said. "With such a maximum, how can one hope to gain? It
is impossible."

I stood watching the play. As far as I could see, it was perfectly fair;
but some of the players, keen-faced men, were evidently practised card-
sharpers, swindlers, or men who lived by their wits. The amount of
money constantly changing hands surprised me. As I stood there, one
young man, scarcely more than a lad, lost five thousand francs with
perfect sang-froid. The women present were none of them young, but
were mostly elderly and ugly, of that stamp so eternally prominent in the
Principality of Monaco. The woman, when she turns gambler, always
loses her personal beauty. It may be the vitiated atmosphere in which she
exists; it may be the constant tension of the nerves; or it may, perchance,
be the unceasing, all-consuming avarice—which, I know not. All I am
certain of is that no woman can play and at the same time remain fresh,
youthful, and interesting.

Until that moment I had remained there unnoticed in the excited

crowd, for I had turned my back upon Madame Fournereau, lest she
should recognise in me the woman whom Ernest had undoubtedly
pointed out to her either in the Rooms, in Giro's, or elsewhere.
 But as I began to pass back to the adjoining room, where I considered
there would be less risk of recognition, the green curtains suddenly
opened, and Ernest Cameron stood before me.

CHAPTER XXVII

PIECES TOGETHER THE PUZZLE

I stepped back quickly, while he, with eyes fixed upon that fair-
haired woman, who seemed the centre of a miniature court, failed to
notice me. Upon his face was a dark, anxious look, an expression such as
I had never before seen upon his countenance. Perhaps he was jealous of
the attention shown by that dozen or so of men who were chatting and
laughing with her.

Her appearance was scarcely that of the keeper of an illicit gaming-

house. One would have expected to find some fine, dashing, handsome
woman, in a striking gown, and with a profuse display of jewellery. On
the contrary, she was quietly dressed in a pretty, graceful gown of dove-
grey cashmere, the bodice cut low and trimmed with passementerie, a
frock which certainly well became her rather tame style of beauty. The
only ornament was a small half-moon of diamonds in her hair.

Ernest appeared to take in the situation at a glance, and with his back
turned to her stood watching the baccarat, just as I had feigned to watch
it. Through the great mirror before him, however, he could note all her
actions. She was laughing immoderately at some remark made by one of
her companions, and I noticed how Ernest's face went pale with
suppressed anger. How haggard, how thin, how blanched, nervous, and
ill he looked! Usually so smart in attire, his dress clothes seemed to hang
upon him, his cravat was carelessly tied, and in place of the diamond
solitaire I had bought at Tiffany's for him in the early days of our
acquaintance—which he had worn when we met at Monte Carlo—there
was only a plain pearl stud, worth perhaps ten centimes. Alas! he had
sadly changed. His was, indeed, the figure of a man haunted by the ever-
present shadow of his crime.

It was curious, I thought, that he did not approach her; but the reason
for this became plain ere long. I had returned to the adjoining room, and
was again watching the roulette, when suddenly she brushed past me on
her way out into the corridor, into which several other rooms opened.
Suddenly I heard his well-known voice utter her name in a hoarse
whisper.

"Julie!"

Julie! The person mentioned in the letter of warning which she had
torn up at Enghien!

She stopped, and recognising him for the first time, gasped:

"Ernest! You here?"

"Yes," he responded. "I told you that we should meet, and I have
found you, you see. I must speak to you alone."

"Impossible," she responded. "To-morrow."

"No, to-night—now. What I have to say admits of no delay," and he

strode resolutely at her side, while she, her face betraying displeasure at
the encounter, unwillingly went forth into the corridor.

"Well," I heard her exclaim in impatience, "what is it you have to say

to me? I thought when we parted it was agreed we were not to meet
again."

"You hoped so, you mean," he answered hardly. "Come into one of
these rooms, where we may be alone. Someone may overhear if we
remain standing in this passage."

"Is what you want to say so strictly confidential, then?"

"Yes," he answered, "it is." Then, with every sign of reluctance and
impatience, she opened a door behind them, and they passed into what
appeared to be her own petit salon.
 Again the fire of jealousy consumed me, and without thought of the
consequences of my act, I went straightway to the door, and entering,
faced them.

As I entered, Ernest turned quickly, then stood rigid and amazed.

"Carmela!" he gasped. "How came you here—to this place?"

"How I came here matters not," I answered, in a hard tone. "It is

sufficient for you to know that I have entered here to demand an
explanation from you and this woman—your accomplice."

"What do you mean?" cried his companion, in her broken English.

"What do you mean by accomplice?"

"I refer to the murder of Reginald Thorne," I said, as quietly as I was

able.

"The murder of Monsieur Thorne," repeated the woman. "And what

have I to do, pray, with the death of that gentleman, whoever he may
be?"

Ernest glanced at me strangely, and then addressed her in a firm

voice.

"The person who murdered him was none other than yourself—Julie
Fournereau."

I stood dumbfounded. Was it possible that he intended to endeavour

to fix the guilt upon her, even though I knew the truth by the words I had
overheard, which were paramount to an admission?

"What!" she shrieked, in fierce anger, speaking in French. "You have

sought me here to charge me with murder—to bring against me a false
accusation? It is a lie! You know that I am innocent."

"That point, madame, must be decided by a judge," he answered,

with marvellous coolness.

"What do you mean? I don't understand!" she exclaimed, with a

slight quiver in her voice which betrayed a sudden fear.
 "I mean that during the months which have elapsed since the murder
of my friend Thorne, at Nice, I have been engaged in tracing the assassin
—or, to put it plainly, in tracing you."

I stood there, utterly astounded. If his words were true, why had he
been concealed on board the Vispera in order to avoid arrest?

She laughed, instantly assuming an attitude of defiance.

"Bah!" she said. "You bring me here into this room to make this
absurd and unfounded charge! You dare not say it before my friends.
They would thrash you as if you were a mongrel of the streets!"

His cheeks were pale, but there was a fierce and resolute expression
upon his countenance. The woman whom I had believed he loved was, it
seemed, his bitterest enemy.

"I have not the slightest wish to bring upon you any greater exposure
or disgrace than that which must inevitably come," he said coolly. "For
months I have been waiting for this opportunity, and by means of the
cipher fortunately discovered your return. I was then enabled to give the
police some highly interesting information."

"The police!" she gasped, her face instantly blanched to the lips.
"You have told them?"

"Yes," he responded, gazing steadily upon her, "I have told them."

"Then let me pass," she said hoarsely, making towards the door.

But in a moment he had barred her passage, then raised a small

whistle quickly to his lips, and blew it shrilly.

"So this is your revenge! I was warned of this from Brussels!" she
cried, turning upon him with a murderous light in her eyes. But almost
before the words had left her mouth there were sounds of scuffling and
shouting, a smashing of glass, and loud imprecations. The whistle had
raised the alarm, and the police had entered the place, and were
preventing the egress of the players.
 Outside, in the corridor, there were several fierce scrimmages, but
next instant the door opened, and there entered three detectives—of
whom one was the wizen-faced little man who had betrayed such an
interest in myself when at the Grand Café—accompanied by old Mr.
Keppel, and the woman who had been my travelling companion in the
wagon-lit. Certainly the arrangements perfected by the police in order
that their raid upon the private gaming establishment might be successful
in all respects had been elaborately prepared, for at the signal given by
Ernest the coup was instantaneously effected, and the players, nearly all
of whom were persons known as criminals, fell back entrapped and
dismayed.

The old millionaire and his companion were just as astounded to find
me present as Ernest had been. But there was no time at that exciting
moment for explanations. The plan had apparently been arranged for the
arrest of the white-faced woman, who now stood trembling before us.

"I tell you it's a lie!" she cried hoarsely. "I did not kill him."

But Ernest, turning to the shabby little man, said:

"I demand the arrest of that woman, Julie Fournereau, for the murder
of Reginald Thorne at the 'Grand Hotel,' in Nice."

"You know her?" inquired the detective. "Have you evidence to

justify the arrest?

"I have evidence that she committed the murder—that the sixty
thousand francs stolen from the dead man's pockets were in her
possession on the following morning; and, further, that on the night on
which the murder was committed she was staying under another name at
the very hotel in which Mr. Thorne was found dead."

"And the witnesses?"

"They are already in Paris, waiting to be called to give evidence."

A dead silence fell for a few moments. We each looked at one

another.
 The wretched woman, who had suddenly been denounced by the man
with whom she had been so friendly at Monte Carlo, was standing in the
centre of the room, swaying forward, supporting herself by clutching the
edge of the small table. Her white lips trembled, but no word escaped
from them. She seemed rendered speechless by the suddenness of the
overwhelming charge.

The detective's voice broke the silence.

"Julie Fournereau," he said in French, advancing a few steps towards

her, "in the name of the law I arrest you for the murder of Reginald
Thorne at Nice."

"I am innocent!" she cried hoarsely, her haggard eyes glaring at us

with a hunted look in them. "I tell you I am quite innocent!"

"Listen," said Ernest, in a firm tone, although there was a slight catch
in his voice, which showed how greatly excited he was. "The reasons
which have led me to this step are briefly these. Last December, while
living here in Paris, I went south to spend the winter at Monte Carlo. I
stayed at the 'Metropole,' and amid the cosmopolitan crowd there met the
woman before you. One day there arrived at the same hotel, from Paris,
my friend Reginald Thorne, whom I knew well in London, but who had
lived in Paris for the past year. We were about together during the day,
and in the Rooms that evening he encountered me walking beside this
woman Fournereau. That same night he came to my room, and in
confidence related to me a story which at the moment I regarded as
somewhat exaggerated, namely, that he had been induced to frequent a
certain gaming-house in Paris, where he had lost almost everything he
possessed, and how he had ultimately discovered that an elaborate
system of sharping had been practised upon him by the woman and her
male accomplices. That woman, he told me, had left Paris suddenly just
at the moment when he discovered the truth, and he had encountered her
in the Rooms with me. Her name was Julie Fournereau."

I glanced at the wretched woman before us. Her wild eyes were fixed
upon the carpet; her fingers were twitching with intense agitation; her
breath came and went in short quick gasps. Ernest, in his exposure, was
merciless.

"Had she seen him in the Rooms?" I inquired.

 "Yes," he answered. "We had come face to face. He told me that, as
he had been robbed of nearly all he possessed, he was determined to give
information against her. She was, he told me, an associate of bad
characters in Paris, and urged me to cut her acquaintance. His story was
strange and rather romantic, for he gave me to understand that this
woman had made a pretence of loving him, and had induced him to play
in her house, with the result that he lost large sums to a certain man who
was her accomplice. Personally, I was not very much charmed with her,"
Ernest went on, glancing at me. "She was evidently, as Thorne had
declared, acquainted with many of the worst characters who frequent
Monte Carlo, and I began to think seriously that my own reputation
would be besmirched by being seen constantly in her company. Still, I
tried to dissuade my friend from endeavouring to wreak justice upon
such a person, arguing that, as he had lost the money in a private gaming
establishment, he had no remedy in law. But he was young and
headstrong—possibly suffering from a fit of jealousy. After several days,
however, fearing that he might create a scene with this notorious woman,
I at last induced him to go over to Nice and stay at the 'Grand.' While
there, curiously enough, he met the lady who is here present, Miss
Rosselli, and at once fell deeply in love with her."

"No," I protested, in quick indignation, "there was no love whatever

between us. That I strongly deny."

"Carmela," he said, bestowing on me a calm and serious look. "In

this affair I must speak plainly and openly. I myself have a confession to
make."

"Of what?"

"Listen, and I'll explain everything." Then turning to the others, he

went on: "Reginald fell violently in love with Miss Rosselli, not knowing
that she had been engaged to become my wife. When, the day after
meeting her at the hotel, he told me of his infatuation, and heard from me
the whole truth, he seemed considerably upset. 'She loves you still,' he
said. 'I feel certain that she does, for she has given me no
encouragement.' I affected to take no notice of his words, but to me the
matter was a very painful one. I had broken off the engagement, it was
true, but my heart was now filled by bitter remorse. I had seen Carmela
again; all the old love had come back to me, and I now despised myself