1. How were financial markets likely to respond to President Carter’s lecture? Explain.
2. At the time President Carter made his remarks, the inflation rate was running at about 10% annually and accelerating as the Federal Reserve continued to pump up the money supply to finance the growing government budget deficit. Meanwhile, the interest rate on long-term Treasury bonds had risen to about 8.5%. Was President Carter correct in his assessment of the positive effects on the dollar of the higher interest rates? Explain. Note that during 1977, the movement of private capital had switched to an outflow of $6.6 billion in the second half of the year, from an inflow of $2.9 billion in the first half.
3. Comment on the consequences of a reduction in U.S. oil imports for the value of the U.S. dollar. Next, consider that President Carter’s energy policy involved heavily taxing U.S. oil production, imposing price controls on domestically produced crude oil and gasoline, and providing rebates to users of heating oil. How was this energy policy likely to affect the value of the dollar?
4. What were the likely consequences of the slowdown in U.S. economic growth for the value of the dollar? The U.S. trade balance?
5. If President Carter had listened to the financial markets, instead of trying to lecture them, what might he have heard? That is, what were the markets trying to tell him about his policies?

At a press conference in March 1978, President Jimmy Carter—responding to a falling dollar—lectured the international financial markets as follows: I’ve 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 world’s economic growth.

  • CreatedJune 27, 2014
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