Workers in country A have wage contracts for cost-of-living adjustments (COLAs), which adjust wages to offset the effect of inflation, and workers in country B do NOT. When the central banks of countries A and B increase the money supply:

Question

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When the money supply is increased, prices will generally rise due to inflation. However, in country A, wages will also increase through the COLA adjustment, which will further drive up prices. In contrast, workers in country B do not have this mechanism for adjusting wages to inflation, so prices will not increase as quickly. Therefore, prices in country A will increase faster than prices in country B. The presence of COLAs affects the speed of price changes in country A.

Workers in Country a Have Wage Contracts for Cost-Of-Living Adjustments