ECON 121 LT1

Nominal GDP

value of all current goods and services produced by a country computed using current prices

→ can increase simply because prices increased

Real GDP

value of all final goods/services produced by a country using constant (base) prices

Implicit Price Index (IPI)

measures the OVERALL PRICE LEVEL of GDP / a SPECIFIC INDUSTRY compared with base year prices
IPI = (nominal + real) x 100

Consistent-price (real) GDP

“the most reliable GDP measure for economic growth”
→ removes the effect of price change and better measures the actual increase in economic output

Seasonally adjusted GDP

“removes predictable seasonal fluctuations”

(which occurs in Q4 due to holiday spending patterns)

Monetary policy

Where the bank controls the: money supply, output, employment, and aggregate demand

Provisions of liquidity

Central bank acts as “lender of last resort”; they give emergency loans to banks through a liquidity strategy

Financial Stability

the central bank monitors banks and financial institutions

Expansionary (Monetary policy)

a focus on “increased liquidity and shifts in the supply of money”

Interest rates

the price of borrowing and the return to saving

Real interest rate ( r )

the cost of borrowing in real terms (which affects saving, investment, consumption, which affects the loanable funds market”

Nominal interest rate (i)

“the cost of holding money” ; the opportunity cost of hiding money

M/P = L (i, Y)

Purpose of CB’s regulatory role

“to prevent excessive risk-taking by banks”
Banks are financial intermediaries, so savings are transformed into loans for businesses and households

Long-term illiquid

“takes a long time to mature”; can’t immediately be turned liquid

Short-term liquid

“takes a short time to mature`
can be demanded by creditors/departments

illiquid banks

“have enough total assets to cover its liabilities but not enough cash immediately available”

Insolvent banks

“their total assets are less than the total liability even if the bank receives cash”