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.