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1、5HOWTHEECONOMYWORKSWhatIsMacroeconomicsandWhyDoesItMatter?Macroeconomicsisthestudyofthebehaviorofanoveralleconomy.Unlikemicroeconomics,whichexaminesthemarketforparticulargoods,specificassets,typesoflabor,andsoon,macroanalysislooksatthebigpicture—thetotaleconom
2、icactivityofacountry,includingproduction,theunemploymentrate,inflation,interestrates,andthelike.And,crucially,itattemptstounderstandhowthevariouscompo-nentsofthebigpictureinteract.Thetoolsofmicroeconomicanalysisareportablefromgoodtogoodandmarkettomarket.Butwhe
3、nitcomestomacroeconomics,youneedtobecarefulwhenapplyingcon-ceptsthatareusedtounderstandthedynamicsofaneconomysuchastheUnitedStatesto,say,asmallercountrylikeIrelandandsurelytothatofadevelopingeconomy,suchasthatofIndonesia.Ofcourse,thereareconceptsandanalytical
4、techniquesgenerallyapplicabletomostcountries.Indeed,thepurposeofthischapteristopresentthesegeneralideasandshowhowtheycanbeusedtounderstandthedynam-icsofanymacroeconomy.Still,keepinmindthateverycountryneedstobetreatedasaspecialcase.Whydofixed-incomeinvestorscar
5、eaboutthebehaviorofthemacroeconomy?Thereisalmostnodecisionthey’llhavetomakethat5152•MacroeconomicsforMarketProfessionalsdoesn’trequireanunderstandingofwhat’shappeningintheeconomyandtherepercussionsonthefixedincomemarkets.Hereareafewexamples:•Theinteractionbetw
6、eenmovementsinthelevelofeconomicactivityandthecentralbank’sresponseistheprimarydeter-minantofshort-terminterestrates.Short-termrates,inturn,determinethecostoffinancingsecuritiesholdingsaswellasserveasaparkingplaceforportfoliocash.•Longerterminterestratesreflect
7、,amongotherfactors,marketparticipants’viewsconcerningthefuturepathoftheeconomy.•Thereisastronglinkbetweeneconomicactivityandinflation,bothcurrentandexpected.Bondscontainapremiumtocompensateinvestorsforinflation.•Thestageofthebusinesscycleisacrucialdeterminantof
8、corporateprofits.Thishasimplicationsforcorporatebondcreditspreadsaswellasthevalueofanyinstrumentwithacreditcom-ponent,suchascreditderivatives.•Therelativelevelsofinterestrates,inflation,and
