The International Financial Environment

Topics: Exchange rate, Inflation, International trade Pages: 3 (899 words) Published: November 2, 2011
International Finance 535
Assignment #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). The international trade flows will increase if exchange rates hold constant and inflation raises. The exchange rates between two currencies, U.S and U.K is how much each currency is worth to each other. If 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 if U.S. prices increased. The International trade flow is an exchange of goods and services for money between countries. The inflation is a raise in pricing for goods and services in the economy over a period of time. 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 rates hold constant, the capital flows coming from U.S. to the U.K. will decrease because of the U.K. lower interest rate. The capital flow from the U.K. to U.S. will increase. “Most recently, however, foreign flows have become important. Controlling for various factors given by a standard macroeconomic model, we estimate that had there been no foreign official flows into U.S. government bonds over the past year, the 10 year Treasury yelled would currently be 90 basis points higher” said Veronica Warnock ( That’s statistically significant and impacted interest rates for the long-term.

Using the information provided, will Mesa expect the pound to appreciate or depreciate in the future? Explain With the information provided Mesa would expect the pound to depreciate. With the U.K. inflation rate expected to decline Mesa can look...

References: Madura, J. (2010). International financial management: 2010 custom edition (10th Ed.). Mason, OH: South-Western, Cengage Learning.
Published: Warnock, Francis E., and Veronica Cacdac Warnock, 2009, International Capital Flows and U.S. Interest Rates, Journal of International Money and Finance 28: 903-919. Retrieved October 21,2011
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