What were the likely consequences of the slowdown in U.S. economic growth for the value of the dollar? the U.S. trade balance?
A NSWER .Chapter 2 showed that healthy economies have strong currencies and sick economies have weak currencies. Rapidly growing economies use more of the world's resources, and this shows up in the trade figures as a larger trade deficit. But this does not normally lead to a depreciation of the growing economy's currency. Normally what happens is that a growing economy attracts investment and foreign capital, which offsets the larger trade deficit. Theresult is a stronger currency, not a weaker one. This theory was borne out in the early 1980s when the rapid growth of the U.S. economy resulted in a large trade deficit and a soaring dollar.