Fin 535 Assignment #1

1. Explain how the international trade of 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).

International trade flows are the exchange of goods and services for money between different countries. It is referred to as sales or services which cross juridical borders.   Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price levels rises, each unit of currency buys fewer goods and services.

Exchange rates between two currencies, U.S. and U.K. specify how much one currency is worth in terms of the other. When exchange rates are constant but change in inflation (assume rises in this scenario), Due to inflation is U.S.A and holding exchange rate constant, the prices of US exports would increase compared to British prices.

The US demand for British goods would increase as US prices increase due to consumers using cheaper priced goods. So, international trade flows should increase, as U.S. exports would increase this would create a decline in U.K. demand for U.S. exports, but the U.S. demand for U.K. goods would increase as U.S. prices increased.

It is well known that the higher the interest rate the greater incentive for funds to flow across international boundaries and into the economy with the higher interest rates. The international capital flow adjustment to the changes in interest rates while the exchange rate should constant, the capital flows coming from U.S. to the U.K. will decrease because of the U.K. lower interest rate and the capital flow from the U.K. to U.S. will increase.

International capital flows are the financial side of international trade. In other words, when someone imports a good or service, the buyer gives the seller a monetary payment, just as in domestic...