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CFAI Practice: M02 — Understanding Business Cycles

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CFAI Practice: M02 — Understanding Business Cycles

Source: CFAI Official Practice Problems 2026

Questions

1. Productivity highest:

  • A. peak of boom
  • B. maturing expansion
  • C. bottom of recession ✓ — lean production

2. Late expansion, businesses experience decrease in:

  • A. labor costs
  • B. capital investment
  • C. availability of qualified workers ✓

3. Accelerating inflation + borrowing = most likely:

  • A. peak ✓
  • B. contraction
  • C. early expansion

4. Indicator indexes:

  • A. only leading indicators
  • B. highly reliable
  • C. evolve over time ✓

5. Recovery indicators:

  • A. declining inventory-sales + stable industrial production
  • B. rising stock market + decreasing unit labor costs
  • C. decreasing unemployment claims + increasing personal income ✓

6. Nowcasting:

  • A. forecast future trends
  • B. real-time monitoring to estimate present ✓
  • C. study past relationships

7. Best description of economic indicators:

  • A. leading track entire economy
  • B. lagging don’t require revisions
  • C. combination of leading + coincident offer effective forecasts ✓

8. Narrowing 10yr-short term spread, stable prime rate:

  • A. growth
  • B. decline ✓
  • C. stability

9. Stable services inflation, rising permits, increasing unemployment duration:

  • A. conflicting evidence
  • B. cyclical upturn expected ✓
  • C. cyclical downturn

10. Rising inventory-sales, stable unit labor cost, decreased personal income:

  • A. peak has occurred ✓
  • B. about to occur
  • C. will occur in future

11. Increasing personal income + industrial output + S&P 500:

  • A. cyclical upturn occurring ✓
  • B. about to end
  • C. about to begin

12. After increase in aggregate real personal income, most likely to increase:

  • A. equity prices
  • B. building permits
  • C. consumer installment debt-to-income ratio ✓ (lagging)

13. Most appropriate for predicting turning point:

  • A. Industrial Production Index
  • B. average bank prime lending rate
  • C. average weekly hours, manufacturing ✓ (leading)

14. Unemployment is lagging because:

  • A. new job types need definition
  • B. multiworker households
  • C. businesses are slow to hire and fire ✓

15. Lagging unemployment in recovery due to:

  • A. businesses quickly rehiring
  • B. new job seekers entering labor force ✓
  • C. underemployed transitioning

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