u/Badneet

Hi all, the question attached asks about the effect on inflation given actual GDP growth of 3.5%. The platform marks Choice A (decline) as correct, using a potential GDP of 4.9% (1.2% + 2.8% + 0.9%). However, per the CFA curriculum, the correct growth accounting equation is: Potential GDP = ΔA/A + α(ΔK/K) + (1−α)(ΔL/L) = 0.9 + 0.4(2.8) + 0.6(1.2) = 2.74%

Since actual GDP (3.5%) exceeds potential GDP (2.74%), the economy is operating above full capacity, creating an inflationary gap meaning inflation should increase, making Choice C the correct answer right?