CFA Level I · CFA Level I Exam · Understanding Business Cycles
Firms in an economy have experienced a long recession and now see sales stabilizing. Unemployment remains high and capacity utilization is low. Which outcome is most likely over the next several quarters?
Output can most likely grow with little inflation, because idle workers and unused capacity let firms expand production without bidding up wages or prices. Wage pressure and new capital spending appear only after slack is absorbed and utilization is high.
- AOutput can rise with little inflation because spare labor and capacity are availableCorrect
- BInflation will accelerate immediately because firms must pay premiums to attract scarce labor
- CCapital spending will surge first because existing capacity is fully used
Explanation
With slack in labor and capacity, firms can raise output using idle resources without bidding up wages or prices, so inflation stays subdued. Premium wages and capacity-driven capital spending occur later, when utilization is high.
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