Output gap is emerging

CFA Level III Economics
#1

I don’t understand the word " emerging" and the answer of Q9B Exam 2016.

What’s is the meaning of “output gap is emerging”?

from the answer Q9B, "A decline in inflation is typically associated with an output gap. ", output gap means “positive output gap” here?(because I know if the economy is slowdown, inflation declines and output gap become positive). My understanding is correct?

So, by convention, if output gap is negative, we consider there is no output gap?

What’s the meaning of the word emerging in this context?

Thanks

#2

They speak of the emergence of an output gap

Output gap => Current GDP < Potential GDP.

If you see the exhibit, they say that their forecasts for GDP are -0.15% against the consensus of +0.55%

So basically, the GPD growth rate will decline. I think this is what it means.

#3

You meant which GDP growth rate will decline? Real GDP?

And why “their forecasts for GDP are -0.15% against the consensus of +0.55%” indicates the GDP growth will decline?

And so what is the relation between this and the “emerging of output gap”?

#4

I guess I was inaccurate.

They expect GDP to decline(It may or may not actually decline) because they expect growth rate to be -0.15% vs the consensus forecast of +0.55%.

So since they expect GDP to decline, they expect the output gap to increase(GDP to grow at a rate less than the potential GDP in this case). I think the focus shouldn’t be on the word emergence as much as what it means.

Just know that they have a certain expectation and know how that expectation is important for answering the question.

#5

I see. If I understand correctly, the consensus forecast plays the role of potential GDP in the formula

Output gap = potential GDP - current GDP

And the forecast of Chadhuri will be the current GDP in the future (which is even lower than the current GDP, the current GDP is actually lower than the potential GDP), So the output gap, which is actually positive, will be more positive (the output gap is widen in the future) => we can conclude that the output gap is emerging.

#6

Yea pretty much. However, I don’t think the consensus actually dictates the potential GDP. Potential GDP is a function of actual economic activity, its just that the consensus is more optimistic than Chaduri in this case.

#7

Just a question from my side to this question.

The answer says that the output gap comes from (i) negative GDP growth and (ii) lower than expected inflation.

Would it now be incorrect if I answered this with another information given in the text e.g. lower than expected business spending? My logic was along the lines of: lower than expected business spending means businesses forecast a worsening of the economy, which means that actual GDP might be lower than trend GDP, thus an output gap emerges.

Or put differently, if CFA gives an answer, are these exhaustive!? I don’t think so (hopefully). Also thinking about the questions “name sth that decreases the ability to take risk”…

Kind regards

#8

This Q (or sth very similar) was discussed in another thread, and I agree with you. I answered output gap + business spending and I found output gap + inflation in the answer.

I have no idea whether the guideline answers are exhaustive or not, but I’m afraid graders do receive a set of acceptable answers and if yours is not among them you suck.

Especially with some of the AM questions I feel that there is not sufficient information given, and you implicitly assume something which the question writer does not implicitly assumes.

There was a question somewhere to choose btw. 3 option strategies as hedging and I chose an other one, thinking they want the cheapest one. Which was not in the question, I just assumed. But this is not a verbal exam, you are not given the chance to argue for your reasoning (like it is in real life in front of a decision making committee).

#9

Your answers not bad but you might wanna refer to an impact on inflation as well. You never know what they’re looking for so taking out 30secs more and insuring yourself would be prudent. Techinicality is key here.