United States had large and growing trade deficit between 1980 and 1985. Despite this, the value of U.S. dollar rose during this period. Which of the following is a factor that caused this occurrence?

Question

Quizplus · Accepted Answer

Despite the growing trade deficit, the United States attracted heavy inflows of capital from foreign investors during the period, which increased the demand for the U.S. dollar and drove up its value. This is known as the "Dutch Disease" effect, where a natural resource boom (in this case, foreign investment) causes a currency to appreciate, making other exports less competitive and increasing imports. The other options (B, C, and D) do not directly explain why the value of the U.S. dollar rose during the period.

United States Had Large and Growing Trade Deficit Between 1980