1)Explain how current account and budget deficit (twin deficit) are related so that changes in one are reflected in changes in the other . Explain.

2)Capital account surplus indicates that the country is net creditor in the world. True or False? Explain.

3)Birefly explain the difference between absolute and relative PPP.Explain.

4)Explain three basic sources ofdeviations from PPP.

5)Empiricalstudies find that exchange rates are much more variable theninflation differentials. How can youexplain this empirical result?