If a large number of laborers shift from fixed-wage contracts to wages that depend on the cost of living adjustments, the long-run aggregate supply curve for the economy will become relatively steeper.

Question

Quizplus · Accepted Answer

If wages become tied to the cost of living, then laborers will demand higher wages during times of inflation, causing an increase in costs for businesses and a decrease in long-run aggregate supply. This makes the long-run aggregate supply curve steeper.

If a Large Number of Laborers Shift from Fixed-Wage Contracts