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IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

During the upswing of the business cycle, a manufacturing firm in India notices rising consumer spending and falling unemployment. Which response is most consistent with sound business planning at this stage?

The firm should review capacity and inventory to meet rising demand while watching wage and input cost pressures. In an upswing demand is growing, so cutting capacity, freezing hiring or cutting prices would be inconsistent with the conditions the firm faces.

  1. ACut capacity immediately because a downturn always follows within a quarter
  2. BReview capacity and stock levels to meet higher expected demand, while watching for rising input costs and wagesCorrect
  3. CStop all hiring to preserve cash, since demand is unlikely to persist
  4. DLower prices sharply to build market share, since demand is already rising
  5. Move all surplus cash into fixed-term deposits and defer all investment

Explanation

In an upswing demand grows, so firms plan capacity and inventory to meet it while monitoring cost pressures such as wages and input prices. Cutting capacity or freezing hiring ignores the demand signal. Cutting prices sacrifices margin when demand is already strong.

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