MES 19 7.000 6.500 51 6.000 5.500 5.000 4.500 4.000 3.500 3.000 DL 2.500 2.000 1.500 1.000 0.500 Real Wage (W/P) 90 000 91 000 92 000 93,000 94,000 95,000 96,000 97 000 93,000 99,000 100,000 101,000 102,000 103,000 104,000 105,000 Number of Workers (L) Consider the Labor Market Graph above. This graph shows the labor market conditions in a hypothetical country. The natural rate of unemployment in this country is 5 percent. In other words, even during normal times 5 percent of the labor force is unemployed. The natural unemployment is solely due to labor market frictions. The potential GDP in this country equals Yp = 10,000. Okun's alpha equals 2. Currently, the nominal wage rate is W = 400 and the price level is P : 100. Suppose that foreign countries reduce their demand for domestic goods. As a result, demand for labor decreases by 2,000 workers. Suppose that the reduction in foreign demand for domestic goods causes the domestic price level to decrease by 20 percent and the resulting reduction in demand for labor causes the nominal wage rate to decrease also by 20 percent. 80 now we have the following: Real wage = Cyclical rate of unemployment = percent Overall rate of unemployment : percent Real GDP