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IAI Actuarial Core Principles · Business Economics · Business activity, unemployment and inflation

A manufacturing firm sells durable goods whose demand rises by a larger percentage than national income in booms and falls by a larger percentage in slumps. How is its demand best described?

Demand is procyclical with income elasticity above one. It moves in the same direction as national income and by a larger proportion, which is typical of durable and luxury goods. Necessities would have elasticity between zero and one.

  1. ACountercyclical with income elasticity below zero
  2. BProcyclical with income elasticity greater than oneCorrect
  3. CAcyclical with income elasticity of zero
  4. DProcyclical with income elasticity between zero and one
  5. Countercyclical with income elasticity above one

Explanation

Demand moving in the same direction as national income is procyclical. Moving by a larger proportion means income elasticity exceeds one, which is typical of luxury and durable goods. Elasticity between zero and one would be a necessity-type good that moves less than income.

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