Financial Markets and the Economy

The Bond and Foreign Exchange Markets

Learning Objectives

1. Explain and illustrate how the bond market works and discuss the relationship between the price of a bond and that bond's interest rate.
2. Explain and illustrate the relationship between a change in demand for or supply of bonds and macroeconomic activity.
3. Explain and illustrate how the foreign exchange market works and how a change in demand for a country's currency or a change in its supply affects macroeconomic activity.
   

In this section, we will look at the bond market and at the market for foreign exchange. Events in these markets can affect the price level and output for the entire economy.