Fundamentals of Financial Instruments, 2nd Edition

CHAPTER 13The Macroeconomics of Financial Markets

The financial markets are a key component of the economy of a country. Thus, it is not surprising that decisions taken by the government of a country and its central bank have major consequences for the working of such markets. Activities in a country's domestic financial markets are related to activities in foreign markets as well. Thus, decisions taken in one country invariably have implications for the financial markets of other countries.

The policies of significance for a country's financial markets are the fiscal and monetary policies designed and implemented by the federal government and the central bank, respectively. An economy's interest rates, which influence all decisions of significance, are determined by such policies. Trade with foreign countries, foreign investments in the domestic economy, and a country's investments in foreign economies are also influenced by such policies.

ECONOMIC GROWTH

Economic growth is a measure of the expansion of an economy over time. It is measured by comparing the output for a period, such as a year or a quarter, with the output of the previous period.

Output in an economy is referred to as the gross domestic product or GDP. We will define the GDP shortly, as well as a related measure known as GNP or gross national product. Considering that inflation is a constant feature in life, GDP will increase over time even if the real output remains constant. Consequently, the standard practice ...