Can someone help me with Problem 20 on page 290 of Schweser? I am not able to understand this one.

Answer is pretty clear to me.

In the passage they’ve used the words ‘attractive yields’, ‘large current account deficits’ and ‘large inflow of capital’.

All of these point towards an environment of overvalued currency and higher than average interes trates. A currency depreciation would help reverse all of the above and bring it back to the long run average

I don’t know why I couldn’t understand it. Thank you anyways. Also there is a line in reading 14 which says Regulatory arbitrage occurs when businesses shop for a country that allows a specific behaviour rather than changing behaviour. Regulatory arbitrage also entails exploiting the difference between the economic substance and interpretation of a regulation. Can someone explain what does it mean?