Aknet Company specializes in the production of small fancy picture frames, which are exported from the U.S. to the United Kingdom. Aknet invoices the exports in pounds and converts the pounds to dollars when they are received. The British demand for these frames is positively related to economic conditions in the United Kingdom. Assume that British inflation and interest rates are similar to the rates in the U.S. Aknet believes that the U.S. balance-of-trade deficit from trade between the U.S. and the United Kingdom will adjust to changing prices between the two countries, while capital flows will adjust to interest rate differentials. Aknet believes that the value of the pound is very sensitive to changing international capital flows, and is moderately sensitive to international trade flows. Aknet is considering the following information:

The U.K. inflation rate is expected to decline, while U.S. inflation rate is expected to rise.

British interest rates are expected to decline, while U.S. interest rates are expected to increase.

a. Critically evaluate how the international trade flows should initially adjust in response

to the changes in inflation (holding exchange rates constant). Critically explain how the

international capital flows should adjust in response to the changes in interest rates

(holding exchange rates constant). [20 Marks]

Note: Kindly Answer worth 20 marks or do not answer. Thank You