Scenario 2: The S&P 500 forward earnings yield is 4.5 percent, the 10-year T-note yield is 4.0 percent, and the average difference between the S&P 500 forward earnings yield and the 10-year T-note over the last 20 years has been 0.25 percent. Scenario 3: The long-term inflation rate is expected to be 2 percent and the long-term average carnings growth is expected to be 1 percent real. Schmidt points out that the Fed model has been the subject of criticism and recommends that Carmichael use the Yardeni model to value the U.S. equity market. Before employing the Yardeni model, Carmichael asks Schmidt to identify criticisms of the Fed model that are addressed by the Yardeni model. Finally, Carmichael presents a third earnings-based approach, the P/10-year MA(E) model, and describes many positive features of that model. Schmidt mentions that the international life insurance company that he represents might be interested in the equity forecasts produced by Supranational. He says that his company s objective is to accumulate sufficient assets to fulfill the firm's obligations under its long term insurance and annuity contracts. For competitive reasons, the company wants to quickly detect significant cyclical turns in equity markets and to minimize tracking errors with respect to the equity index. Schmidt asks Carmichael to identify the forecasting approach that is most appropriate. 1 1. Which of the statements expressed by Schmidt about the neoclassical approach to growth accounting is correct? A. Statement 1. B. Statement 2. C. Statement 3