1. Suppose that Home maintains a stable fixed exchange rate with Foreign. What does this imply about the relationship between the two countries' interest rates? Suppose that the exchange rate becomes unstable and investors expect Home to abandon the exchange rate system in the near future. Why would investors expect this? What would this imply about the relationship between the two countries' interest rates?

2. Some countries, such as the United States, can experience large current account deficits at the same time as they experience large government budget deficits. This scenario is referred to as "twin deficits" in the current account and the government budget. Is it possible that government budget deficits can be the cause of CA deficits? Is it possible that there are other causes of CA deficits? If so, provide an example.