If workers in country A have COLAs and country B does not, when the money supply grows, prices in country A will:

• A. prices in country B increase faster than prices in country A.
• B. prices in country B decrease.
• C. prices in country A increase faster than prices in country B.
• D. COLAs have no effect on the speed of price changes.

Answer: (C)

COLAs tie nominal wage growth to the price level, so when the money supply grows and prices start to rise, workers in the country with COLAs experience higher wages automatically. That keeps their purchasing power up and supports sustained or even increased consumer spending, which feeds more demand and encourages firms to raise prices further. In the country without COLAs, prices rise but wages do not automatically keep up, so real wages fall and spending growth slows, dampening inflation.

So the country with automatic wage adjustments experiences faster inflation than the one without. The other scenarios don’t fit because they either reverse the direction (inflation faster in the non-COLA country) or imply deflation or no effect, which isn’t consistent with how COLAs amplify price level changes when the money supply expands.