The existence of COLAs in an economy will introduce
A)real wage rigidity and shift the LP curve.
B)real wage rigidity and shift the SP curve.
C)nominal wage rigidity and shift the SP curves.
D)nominal wage rigidity and shift the LP curve.

Question

Quizplus · Accepted Answer

COLAs (Cost of Living Adjustments) are adjustments made to wages or salaries in order to account for changes in the cost of living. These adjustments are usually tied to inflation rates, which means that they can introduce real wage rigidity. Real wage rigidity occurs when wages are slow to adjust to changes in the labor market. This can cause a shift in the SP (short-run Phillips) curve, as price and employment levels become less responsive to changes in the economy.

The Existence of COLAs in an Economy Will Introduce