Evaluating a Policy Response to an Input Cost Shock
Consider an economy where firms' production depends on an imported component. Due to a global shortage, the price of this component rises significantly. A policymaker argues, 'To protect workers' living standards, we should immediately legislate a higher minimum wage to counteract the rising cost of living.'
Critically evaluate this policy proposal using a framework where firms set prices based on a markup over their costs (wages and components) and the wage level reflects the bargaining power of workers. Will this policy likely achieve its goal of restoring workers' purchasing power without negative side effects on employment? Justify your conclusion.
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Introduction to Macroeconomics Course
Ch.2 Unemployment, wages, and inequality: Supply-side policies and institutions - The Economy 2.0 Macroeconomics @ CORE Econ
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