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Consider the Graph. This graph shows the labor market conditions in a 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 unemployment. The natural unemployment is solely due to labor market frictions. The potential GDP in this country equals YP= 100,000. Okun's alpha equals 2.

Currently, the nominal wage rate is W = 500 and the price level is P = 100. As a result, currently_______persons are naturally unemployed and______persons are cyclically unemployed.Moreover, the real GDP in this country equals__________units.

Suppose that the country opens its doors to foreign trade and as a result demand for domestic goods increases. The high demand for domestic goods encourages many firms to hire additional workers. The increase in foreign demand for domestic goods results in 50 percent increase in the price level. The resulting excess demand for labor causes the money wage to increase by 20 percent.

So now we have the following:

Nominal (or money) wage =_______

Price level =______

Real wage =______

Natural rate of unemployment =______ percent

Cyclical rate of unemployment =______ percent

Overall rate of unemployment =______ percent

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