1. Consider that in the UK inflation and interest rates are expected to decline due to Brexit while in the US it both will rise due to full employment and Fed policy. Explain how the international trade flows should initially adjust in response to the changes in inflation (holding exchange rates constant). Explain how the international capital flows should adjust in response to the changes in interest rates (holding exchange rates constant).
2. In considering the depreciation of the Asian currencies during the Asian crisis (1997: and the depreciations were severe and came very rapidly) due to trade flows or capital flows? Why do think the degree of movement over a short period may depend on whether the reason is trade flows or capital flows?