CFA Level I · CFA Level I Exam · Understanding Business Cycles
Early in a recovery from a recession, firms with ample spare capacity face rising demand. Which response is most likely?
Firms most likely first increase hours worked by existing employees and use idle capacity. This is cheaper and reversible while they are uncertain the recovery will last. Permanent hiring and major capital expansion typically follow later, once confidence in sustained demand grows.
- AIncrease hours of existing workers and use idle capacity before making large new hiresCorrect
- BImmediately commit to large capital expansion and permanent hiring
- CCut output further until sales growth is confirmed over several years
Explanation
Early in a recovery firms are uncertain whether demand growth will last. They first raise hours and use existing slack capacity, which is cheaper and reversible. Large capital spending and permanent hiring come later once the expansion is established.
Did you get it right without looking?
One question tells you little. A timed set on Understanding Business Cycles shows your real accuracy, how long you take and where you lose marks.
More Understanding Business Cycles questions
- Which set of conditions is most likely to be observed near the peak of a business cycle?
- During which phase of the business cycle is an economy most likely to experience a rising rate of growth in output together with acceleratin…
- An economy is experiencing a rise in prices that is driven by a sharp increase in aggregate demand while output is above potential. This sit…
- Early in an economic recovery following a trough, firms most likely respond to rising demand by:
- An economy's real GDP growth has slowed for three consecutive quarters but remains positive, and inflation is rising while unemployment is a…
- An analyst wants a business cycle indicator that typically turns down before the economy moves from expansion into contraction. Which type o…