1. After the subprime mortgage crisis of 2008, foreign demand for Thai goods sharply shrank. Thailand was experiencing political turmoil during this period that affected tourism (service exports),...

1. After the subprime mortgage crisis of 2008, foreign demand for Thai goods sharply shrank. Thailand was experiencing political turmoil during this period that affected tourism (service exports), domestic consumption, and the manufacturing sectors (domestic investment). In the first half of 2009, the Thai economy contracted. In the second half of the year, the economy showed signs of recovery following the expansionary fiscal and monetary policies. The GDP for the whole year was still lower than that in 2008.

a. Use a labor market graph to explain how Thailand was affected by the subprime mortgage crisis in the first half of 2009 and the second half of the year.

b. Based on your answer to part a, explain how the Thai economy, which has flexible labor market, could fully recover to the level of real GDP in 2008 without any further government intervention. Assume price rigidity and no shift in labor supply curve.