CFA Level I · CFA Level I Exam · Understanding Business Cycles
An economist observes that the unemployment duration average and the ratio of consumer credit to personal income are both rising sharply, while other data show the economy has already begun to recover. Which interpretation is most likely appropriate?
The best interpretation is that these are lagging indicators confirming a turn that has already occurred. Average unemployment duration and consumer credit relative to income change after the economy turns, so they validate the recovery seen elsewhere instead of predicting its end or marking a peak.
- AThese lagging indicators typically confirm a turn that has already occurredCorrect
- BThese leading indicators signal the recovery will soon end
- CThese coincident indicators show the economy is at its peak
Explanation
Average duration of unemployment and consumer credit to income are lagging indicators. They change after the economy has turned, so movements consistent with the recovery in other data serve as confirmation, not prediction.
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