CFA Level I · CFA Level I Exam · Understanding Business Cycles
At the early stage of recovery following a trough, a firm that cut its workforce during the contraction is most likely to respond to a modest increase in demand by:
Firms most likely lengthen hours and use temporary workers first. Early in a recovery, managers doubt the durability of demand and have spare capacity, so they delay permanent hiring. This is why employment tends to lag the cycle's turning points.
- Aincreasing hours worked and using temporary workers before hiring permanent staffCorrect
- Bimmediately hiring many permanent workers to restore pre-recession staffing
- Cfurther reducing hours worked to protect profit margins
Explanation
Early in an expansion, firms are uncertain that demand will last, so they first raise hours and use temporary workers, and they use existing capacity. Large permanent hiring comes later, which is why employment is a lagging indicator.
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