Case Number One: President Carter Lectures the Foreign Exchange Markets

At a press conference in March 1978, President Jimmy Carterresponding to a falling dollarlectured the international financial markets as follows:

Ive spent a lot of time studying about the American dollar, its value in international monetary markets, the causes of its recent deterioration as it relates to other major currencies. I can say with complete assurance that the basic principles of monetary values are not being adequately addressed on the current international monetary market.

President Carter then offered three reasons why the dollar should improve: (1) the rapidly increasing attractiveness of investment in the U.S. economy as a result of high nominal interest rates, (2) an end to growth in oil imports, and (3) a decline in the real growth of the U.S. economy relative to the rest of the worlds economic growth.

Required Question:

1. What were the likely consequences of the slowdown in U.S. economic growth for the value of the dollar? The U.S. trade balance?