You are an economic consultant to the International Monetary Fund, engaged to report on macroeconomic policy in various countries. You are working on the following case.
Two countries, Maynardia and Pigovia, are concerned about their current levels of unemployment. In both countries, certain business interests are agitating for generalised cuts in nominal wages as a response to the unfavourable labour market conditions.
The following information is available regarding each country:
• Maynardia’s main exports are highly prized luxury goods. ‘Basic’ goods, consumed by most wage earners are either fully imported or produced in industries subject to very high import-sales ratios. Furthermore, importing in Maynardia is a highly concentrated activity, dominated by a few large firms. Maynardia has a floating exchange rate.
• Maynardia has a history of industrial conflict over job losses caused by imports. The proposed wage cuts promise to be highly unpopular, especially as some within the government have hinted that this is merely the first of a round of such reductions.
• The distribution of wealth is highly skewed in Maynardia, with 90% of shareowners accounting for only 2% of total holdings. Furthermore, questionable banking practices have induced many households and businesses to take on significant amounts of debt.
• Pigovia has a fixed exchange rate and healthy, and competitive, import-replacement industries, with the majority of ‘basic’ goods being produced domestically.
• The wage determination system in Pigovia is much more centralised than in Maynardia, with an emphasis on agreed outcomes at the aggregate level in the context of an overall prices and incomes policy framework. It has been agreed that the proposed wage cuts will be reversed when economic conditions improve.
• The degree of wealth and income inequality in Pigovia is much less than in Maynardia, and a cultural aversion to debt has kept household debt at consistently low levels.
Prepare a short report outlining:
1. The reasoning underlying the arguments for wage cuts in Maynardia and Pigovia;
2. The reasons why the policy is or is not likely to be successful in Maynardia and Pigovia, given their particular characteristics;
3. How the effects of the policy can be represented in terms of aggregate supply and aggregate demand in each country, given their particular characteristics.

could economist help me to answer this question? this is my tut question, but i confuse about it, thx a lot

This is a whopper of a question.

Start by modeling the labor supply and demand for labor in both Maynardia and Pigovia. What is shape of the supply curve for labor in each country (elastic or inelastic).

Next model the output markets for Maynardia goods and for Pigovia goods. What is the shape of the demand for Mayardia products by its owns citizens, what is the shape from the international community. Ditto for Pigovia. Are prices determined by competitive markets or by some oligolopy.

Now, impose a wage cap in each country. How is the supply of export-goods affected?

Finally, layer on the constraints caused by floating or fixed exchange rates.

Good luck. Take a shot.

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