CFA Level I · CFA Level I Exam · Understanding Business Cycles
Early in an economic recovery following a trough, firms most likely respond to rising demand by:
Early in a recovery, firms most likely raise output by using existing workers' hours and spare capacity before hiring many new staff. Uncertainty about whether demand will last makes them cautious. Acute shortages and rapid price rises appear later, and sharp capital spending cuts belong to contractions.
- Acutting capital spending sharply to rebuild profit margins
- Bincreasing output from existing workers and hours before making many new hiresCorrect
- Craising prices rapidly because of acute shortages of labor
Explanation
Early in a recovery, firms have spare capacity and uncertainty about durability of demand, so they first use existing workers' hours and idle capacity before hiring broadly. Rapid price increases from labor shortages occur later in the expansion. Sharp capex cuts fit a contraction.
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