Question: During 1983, 1984, and 1985, the dollar was overvalued and kept rising. During that period, real imports rose $160 billion and real exports rose only $27 billion, while real GDP rose an average of 5.1% per year. During the next four years, the dollar declined and returned to equilibrium. Real imports rose $118 billion while real exports rose $188 billion, but the growth rate moderated, rising at an average of 3.6%.
(A) In order to explain the difference in growth rates of the economy during these two periods, what other information would you need?
(B) The turnaround in the dollar occurred when the Fed made a publicly announced decision to reduce the real rate of interest. However, that would ordinarily stimulate domestic demand, yet the figures above indicate that it grew at a slower rate. Why did the economy grow more slowly when the dollar was declining and interest rates were low than when the dollar was rising and interest rates were high?
(C) To what degree was the slower growth in investment during the 1986-9 period directly related to the decline in foreign saving? What other components of saving declined?