In Nancy Drew: Shadow at the Water’s Edge, you will need to use the knife to cut the rope and escape. This is a timed puzzle, since you have limited air and are being held down underwater by the Yurei. Get your knife out of your inventory and cut strings from one end to the other.
You can cut from top to bottom, or from left to right, but the goal is to cut as few strings as you can in order to escape. There are multiple solutions, but you can refer to the video for one of them.
