The over valued Dollar of the 1980s

The decade of the 1980s witnessed a dramatic cycle of dollar appreciation and depreciation. The rise of the dollar began in 1980 after tight monetary policy and loose fiscal policy in the United States drove interest rates up splashily interest rates at home and economic turmoil abroad attracted funds into, the dollar. Figure shows that during the period from 1979 to ear1y 1985 the exchange rate on the dollar rose 80 percent.

In 1985, many economists believed the dollar was menaced an is one whose value is high relative to its long-run or sustainable level.

Figure 30-5 illustrates the dramatic effect of the appreciating dollar on trade flows. From the peak in 1980 to the trough in 1986, real net exports declined by $158 billion-e-this amounted to 3 percent of 1983 GDP.

By itself, this sharp decline in net exports would be contradictory. Unfortunately, the trade impact reinforced a decline in domestic demand induced by tight monetary policy. The result was the deepest recession in years.

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