President Carter last week took his boldest and most sweeping action yet to halt the runaway side in the dollar. In a series of moves, Carter ordered a sharp increase in U.S. interest rates and warned that the U.S. will intervene "massively" in the currency markets to prevent a further decline.And he backed his promises up with a new $28.2 billion pool of money.

Why did Carter act as he did, and will the moves heighten chances for a recession in the U.S. as some economists have predicted? Here, in question-and-answer form, is a non-economist's guide to understanding last week's White House actions. The answers were compiled by The Washington Post, with the help of administration officials, private economists and market experts.

QUESTION: President Carter took some sweeping actions last Wednesday to boister the dollar.Why did he do this, and will his actions increase the risk of recession as some economists say?

ANSWER: Carter acted because his advisers concluded the dollar had fallen so sharply it appeared apt to jeopardize the adminstration's anti-inflation effort and plunge the nation into a slump. The dollar had been declining in foreign exchange markets for several weeks, but on Oct. 25 - following announcement of Carter's new wage-price program - it got out of hand. The dip is inflationary because prices of foreign imports go up when the dollar's value drops - and U.S. firms often raise prices of the goods they sell to compete.

Q: But won't the president's actions heighten the risk of recession, too?

A: Probably, but it's still too early to tell whether the risk is higher now than if the administration hadn't acted. The most dangerous part of the package was the decision by the Federal Reserve Board to raise its discount rate - the most visible symbol of credit-tightening - a full percentage point to a record 9.5 percent. If other interest rates - such as the prime rate and mortgage rates - follow, it could seriously crimp the economy. Many economists felt the Fed already had pushed interest rates to the brink.

Q: How does raising interest rates and tightening credit hurt the economy?

A: In two ways. First, it makes borrowing more expensive and denies credit to smaller business and individuals, putting a damper on expansion and new investment. More immediately, however, the increase puts a dent in homebuilding by prompting investors to take their money out of savings and loan institutions - which provide the bulk of the financing for the housing industry - and to transfer it into other investments. Because so many other sectors depend on the housing industry, the impact can be severe.

Q: Why had the dollar been declining?

A: Well, there are long-term reasons and more immediate ones. For many years, the dollar was clearly the kingpin of currencies - mainly because the U.S. economy was far stronger than others. But that was based on conditions just after World War II. In the '50s and '60s, other nations - notably West Germany and Japan - rebuilt and caught up with the U.S. But the currency values weren't allowed to reflect the change - straining the entire world monetary system. The U.S. devalued the dollar in 1971, and it has been falling ever since.

The most recent series of slides began in late 1977 when the markets began getting jittery about the failure of the U.S. to take economic actions they thought were necessary. Inflation was speeding up, but the U.S. had no anti-inflation program.

Q: Why is it so bad for the dollar to decline? I thought under our new system of "floating" exchange rates, it was supposed to be okay for a currency to slip a bit.

A: That's right - within limits. Technically, there's nothing really wrong with the dollar's declining, provided it's part of an "adjustment" to take account of changes in the U.S. economy. Under normal circumstances, the dip ought to relieve pressures on the dollar. And the cheaper dollar should help reduce our trade deficit - by making imports less attractive and American exports more competitive. The problem is, the decline also adds to U.S. inflation. And if the dollar slides too far, it could risk causing a recession.

Q: But American officials have been contending the dollar has fallen far more sharply than is justified by economic conditions. Are they wrong, or is there something else making the dollar go down as well?

A: On this point, a lot of economists would agree with the administration. But there's another aspect to the markets that's sometimes overlooked: Their daily ups and downs aren't always linked to what's really going on in the world. Sometimes the market moves simply because the currency traders think they can make more money pushing it a particular way. For all the talk about the legendary "gnomes of Zurich," these traders aren't analytical geniuses. Mass psychology often rules. The trick is to stay ahead - the dollar be damned.

Q: Are these the "speculators" the administration keeps talking about?

A: Yes. But the "speculation" comes in two forms: First, there are the genuine "speculative attacks," where traders drive the dollar down (or up) for their own advantage. That's dangerous, and detrimental to the world economy. But there's also some speculation by corporations and individuals with business interests abroad, who need to use foreign currencies in their transactions. They "play the market" simply to avoid suffering losses when currencies change in value. But they add to the problem, anyway.

Q: Well, if these speculators are so bad, why doesn't anyone crack down on them?

A: There's very little anyone can do. If the industrial nations imposed restrictions on the currency markets, it would crimp worldwide economic transactions. We could return to fixed exchange rates - from the floating-rate concept adopted in the early 1970s - but the pressures on nations to devalue or upvalue their currencies might wreak more havoc than the present system. It's just like trying to bell the stock market. The result might well prove worse than the present problem.

Q: Exactly what did the president do on Wednesday, and what was he trying to accomplish?

A: Well, the package was a complex one, but basically it had two parts:

First, Carter served notice that the U.S. no longer would tolerate the runaway speculation against the dollar, and would intervene "massively" in the foreign exchange markets - by buying up billions of dollars if necessary - to stop it. The pledge was backed up by an unprecedentedly large money pool - of some $28.2 billion. And West Germany, Switzerland and Japan joined in the effort.

Second, Carter acceded to a sharp rise in U.S. interest rates designed to make it more attractive for investors to hold dollars rather than foreign currencies. And, in a new measure, he ordered the Treasury to begin issuing foreign-denominated U.S. securities, which are expected to lure holders of foreign currencies into trading in their dollars. The difficulty is that higher interest rates here could speed up recession.

Q: Did it work?

A: So far, it seems to have produced results. Immediately after Carter's announcement, the dollar rebounded sharply on the foreign exchange markets. The price of gold - to which speculators always flock when the dollar is in trouble - plummeted. And on Wall Street, the stock market leaped 30 points - its steepest single gain since the wage-price controls of 1971. Most encouragingly, long-term interest rates - considered a key indicator of the market's assessment of U.S. inflation prospects - fell for the first time in months.

Q: If this dollar problem was so critical, why didn't the administration act before? Hasn't the dollar been declining sharply for some time?

A: It has, but the admininstration didn't move to stop it - for several reasons. In the first place, policymakers tended to dismiss the decline as irrational, telling themselves it would only be temporary and most likely would be reversed when the trade and energy situation improved. Second, the strategists recognized that any major rescue effort would mean raising U.S. interest rates - and that could heighten the risk of recession. Some of Carter's key advisers believed interest rates had risen dangerously high already.

Q: Who's to blame for this currency crisis - Carter or the markets?

A: Both. The president had dozens of chances to take actions to slow inflation during his first 20 months in office, but sat by idly while price pressures mounted. He also shunned any really forceful moves to counter the dollar's dedline. As a result, inflation prospects worsened, setting off the dollar's slide. And the markets took it from there, overreacting to the situation and inviting last weeks's harsh action.

Q: I'm confused Before this all happened, the economy seemed likely to muddle along at about the pace that most economists recommended, the administration was planning a tight budget to combat inflation, recession seemed somewhat remote and the markets were sliding uncontrollably. Now, interest rates are threatening to send inflation higher, recession seems around the corner - which could boost unemployment benefits and bust the budget - AFL-CIO President George Meany is advocating wage-price controls and the markets are ecstatic. Am I missing something here?

A: No. That's economics.