CFA Level I · CFA Level I Exam · Understanding Business Cycles
An economy is in the trough of a recession and shows early signs of recovery. Compared with the preceding contraction, which combination of conditions is most likely as the recovery gains traction?
Rising capacity utilization, with unemployment still high but stabilizing and inventories cautiously rebuilt as sales improve. Output recovers first, while labor markets lag. After destocking in the downturn, firms restock carefully. The other combinations describe a contraction, not a recovery.
- AFalling capacity utilization, rising unemployment and rising inventory-to-sales ratios
- BRising capacity utilization, unemployment still high but stabilizing, and inventories being rebuilt cautiously as sales improveCorrect
- CRising unemployment, falling housing activity and falling consumer spending
Explanation
Early recovery features rising output and capacity utilization while unemployment, a lagging indicator, remains high and only stabilizes. Inventories are low after destocking and firms rebuild them cautiously. The other options describe contraction conditions.
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