CFA Level I · CFA Level I Exam · Understanding Business Cycles
During the early phase of an economic expansion, firms most likely respond to rising demand by:
Firms most likely raise hours worked and sell down existing inventories first, because they are unsure the recovery will last. Only when demand proves durable do they hire more workers and rebuild inventories, so the second option is correct.
- Acutting inventories to zero and closing plants
- Bincreasing hours worked and drawing down existing inventories before hiring heavilyCorrect
- Cimmediately ceasing all hiring to protect profit margins
Explanation
Early in an expansion, firms are uncertain that demand will last. They first lengthen hours and sell existing inventory, and only later hire permanent staff and rebuild stocks. Closing plants or freezing all hiring contradicts rising demand.
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