Respond to the following:

1. Describe the four stages of the business cycle.

2. Describe the two hypotheses that explain the shape of the yield curve.

3. Describe the three shapes of the yield curve that tend to be associated with different business cycle stages.

4. Compare the typical profitability of a stage 2 firm versus a stage 3 firm.

5. Develop a list of factors that would result in a firm having high supply risk and high demand risk.

Sizing-up a Business 2

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Institutional Affiliation

Sizing-up a Business 2

1. Describe the four stages of the business cycle.

The term business cycle refers to economy-wide fluctuations in trade, production, and general economic activity. There are four critical phases of the business cycle, which include the peak, trough, contraction, and expansion. Expansion involves an upsurge in employment, economic growth, and upward pressure on prices (Jordà, Schularick, & Taylor, 2017). On the other hand, a peak is the highest point in the business cycle, where there is maximum production of allowed output. There is full or maximum employment and also inflationary pressure s in the process. A contraction follows the peak, which is characterized by the slowing down of growth, declining employment, and upsurge of unemployment and subsidy of pricing pressures (Jordà, Schularick, & Taylor, 2017). The trough stage is when a business hits rock bottom, where the growth is lowest, employment is highest, and there are lowers pricing pressures.

2. Describe the two hypotheses that explain the shape of the yield curve.

One hypothesis is the liquidate preference hypothesis. In this hypothesis, the investors wish to get compensation for having long term bonds. A second hypothesis is the unbiased expectations hypothesis. This is a hypothesis that explains the long term rates, which are the markets’ best guess of average anticipated short-term rates.

3. Describe the three shapes of the yield curve that tend to be associated with different business cycle stages.

The three shapes of the yield curves are normal, inverted, and flat. The normal yield curve, also known as the upward sloping, is where there are longer-term bonds which have higher yields than the short term ones. The normal curves point to economic expansion, whereas the inverted curves point to economic recessions (Choudhry, 2019). In a normal yield curve, there are longer maturity bonds, which have a yield as compared to shorter-term bonds. This is due to the risks associated with time. On the other hand, for the inverted yield curve, there are short term yields that are higher than the longer-term yield (Choudhry, 2019). This is a depiction of an upcoming economic recession. For the flat /hampered curve, both the shorter and longer-term yields are closer to each other, where they are an illustration of an economic transition.

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4. Compare the typical profitability of a stage 2 firm versus a stage 3 firm.

The difference between the two is that there is a relatively lesser profit for Stage 2 Company since it is still a developing company and has just received a start-up capital compared to stage 3. Stage 3 is more profitable since it can expand its goods and services (Hänninen, Jokela, Saarela, & Muhos, 2017). This includes the manufacturing of products since it is already established and that many consumer like to be associated with it.

5. Develop a list of factors that would result in a firm having high supply risk and high demand risk.

The factors include:

• Foreign exchange fluctuations
• The ability of a firm to respond to the rapid technological changes
• The protection of intellectual; property rights
• The highly competitive markets
• Economic outlooks in the major market
• Ability to secure and retain skilled personnel at the company
• The government regulations and guidelines in place
• The global business operations
• Procurement of parts and materials

References

Choudhry, M. (2019). Analysing and interpreting the yield curve. John Wiley & Sons.

Hänninen, K., Jokela, H., Saarela, M., & Muhos, M. (2017). The Early Stages of Growth in Micro-Firms. In Management Challenges in a Network Economy: Proceedings of the MakeLearn and TIIM International Conference 2017 . 227-236.

Jordà, Ò., Schularick, M., & Taylor, A. M. (2017). Macrofinancial history and the new business cycle facts. NBER macroeconomics annual. 31(1), 213-263.