Assume that a large number of workers no longer depend on fixed labor contracts but instead tie their wages to cost of living adjustments. Other things equal, this implies that the slope of the long-run aggregate supply curve is relatively steep.

Question

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If workers tie their wages to cost of living adjustments, any increase in prices will be immediately reflected in their wages. This will lead to an increase in the cost of production for firms and a decrease in the profitability of firms, leading to a relatively steep long-run aggregate supply curve.

Assume That a Large Number of Workers No Longer Depend