Economic Boom: Reaching the Peak of Success - Essay Sample

Introduction

The Boom phase: It is the highest point of all. It is also known as the economic peak or peak. At this point, there is little unemployment or what is the same almost everyone has a job, and the production of companies is also at its maximum levels (Foerster, 2015). In this situation, a point is reached where, as everyone is employed, there is no greater workforce to increase production capacity, therefore it is very difficult for economic growth to continue to grow, a ceiling has been reached, and it is difficult to increase the sales of the companies. Another characteristic of this phase is the salary increase.

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Deceleration or recession phase: In this phase, the economy descends (Foerster, 2015). Production, employment, trade, investments, and also the economic income of employees begins to fall. In this phase, economic growth is negative, and therefore leads the economy to a crisis.

The depression phase: The depression phase is the minimum point of the economic cycle, where uneven productivity occurs (Foerster, 2015). For example, basic products would be less affected since, after all, everyone needs electricity, water, basic food products, among others, but less essential products would be very affected. In other words, since there is no money, people try to spend as little as possible and therefore companies sell just enough.

Recovery Phase: In this phase the economic outlook begins to improve. There is improved economic growth, jobs are starting to be created and existing ones are improving, production increases, the demand for goods and services too, and above all, investments begin to trust companies, and above all, a state is beginning to be noticed of mind in the population much better.

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

Segmentation hypothesis is one that considers that investors and issuers of fixed income securities are divided into groups according to their preference regarding the term, with agents grouped into three large groups (short, medium and long term) and each rate is determined by their supply and demand (Choudhry, 2019).

The hypothesis of pure and unbiased bias is the most accepted by academia and market operators, explaining the shape of the curve based on the expectations of investors and issuers of fixed income securities. For this theory, the forward rate observed today would be an unbiased estimate of the spot rate in the future (Choudhry, 2019).

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

Normal/Positive yield curve: Associated with long-term bonds that have high interest rates compared to short-term bonds. The curve is also associated with low returns for short maturities and high returns for longer maturities. The curve shows a stable and improving economy.

Reverse/Negative yield curve: Associated with short-term bonds that have higher returns and occurs the long-term results are lower that short-term returns. Mostly occurs when the economy is experiencing a recession or slow economic growth.

Flat yield curve: This occurs when both long and short-term returns operate at similar levels showing that the economy is transitioning. It also indicates deteriorating economic conditions when there is a lot of uncertainty.

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

A stage 2 firm has less profit since it is still in its developmental stage and the start-up capital, they have is little. Such a company needs start-up capital to run its activities and develop. A stage 3 company has more profit since customers have already known the business and they are loyal to it. The company can easily expand its processes and reach a wider audience.

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

Some of the factors that would cause a firm to have high supply risk and high demand risk include the fluctuations of foreign exchange rates, presence of highly competitive markets, government and state regulations, rapid technological changes, changes in technology, getting and retaining highly skilled personnel, and the ability to procure parts and materialS (El Hiri, En-Nadi, & Chafi, 2018).

References

Choudhry, M. (2019). Analysing and interpreting the yield curve. John Wiley & Sons. https://www.pearson.com/us/higher-education/product/Foerster-Financial-Management-Concepts-and-Applications/9780132936644.html

El Hiri, M., En-Nadi, A., & Chafi, A. (2018). Effect of Firm Characteristics on Sources of Supply and Demand Risks: An Empirical Investigation on Moroccan Industrial Firms. In International Journal of Engineering Research in Africa (Vol. 40, pp. 162-170). Trans Tech Publications Ltd. https://doi.org/10.4028/www.scientific.net/JERA.40.162

Foerster, S. (2015). Financial management: Concepts and applications. Pearson Higher Ed. https://www.pearson.com/us/higher-education/product/Foerster-Financial-Management-Concepts-and-Applications/9780132936644.html