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CFA Level I · CFA Level I Exam · Understanding Business Cycles

During the late expansion phase of a business cycle, as output approaches its capacity limit, which of the following changes in resource use is most likely?

Capacity utilization rises and labor markets tighten. In a late expansion, strong demand pushes firms to use more of their existing plant and equipment, and the pool of available workers shrinks, so unemployment falls and hiring becomes harder. Layoffs and idle capacity are contraction features.

  1. ACapacity utilization rises and labor markets tightenCorrect
  2. BInventory-to-sales ratios rise sharply as demand collapses
  3. CFirms lay off workers and idle plant to cut costs

Explanation

In a late expansion, demand is strong, so firms use more of their existing capacity and compete for a shrinking pool of unemployed workers, tightening labor markets. Layoffs and collapsing demand with rising inventory ratios are typical of contractions, not expansions.

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