Cost-of-living adjustments are designed to:

• A. compensate individuals for changes in the price level to maintain purchasing power
• B. increase consumer surplus by lowering market prices
• C. reduce willingness to pay for goods and services
• D. eliminate all effects of inflation on producers

Answer: (A)

Verified step by step guidance

1. Understand the concept of cost-of-living adjustments (COLAs): these are changes made to wages, benefits, or payments to offset the effects of inflation on purchasing power.
2. Recall that inflation causes the general price level to rise, which reduces the real value of money and thus the purchasing power of individuals if their income remains constant.
3. Recognize that the primary purpose of COLAs is to adjust income or benefits so that individuals can maintain their ability to buy the same basket of goods and services despite rising prices.
4. Evaluate the given options by comparing them to the purpose of COLAs: they are not intended to increase consumer surplus by lowering prices, reduce willingness to pay, or eliminate all inflation effects on producers.
5. Conclude that the correct understanding is that COLAs compensate individuals for changes in the price level to maintain their purchasing power.