Demand and production

Question 1:

Assume that South Korea and Canada are trading partners.
(a) Explain how each of the following will affect the demand for the Canadian dollar.
(i) The inflation rate in Canada is higher than the inflation rate
in South Korea.
(ii) Real interest rates in Canada fall relative to interest rates in
South Korea.

(b) Given your answers to (a) (ii), indicate how the value of the Canadian
Dollar is affected.
(c) As a result of the currency change in (b), what will happen to Canadian
exports to South Korea? Explain.

Question 2:

Assume that two countries, Atlantis and Xanadu, have equal amounts of
resources. Atlantis can produce 30 cars and 10 tractors or any combinations.
Xanadu can produce 20 cars or 40 tractors or any combinations.
(a) Which country has the absolute advantage in the production of tractors>
Explain how you determine this answer.
(b) Which country has a comparative advantage in the production of cars?
Using the concept of opportunity cost, explain your answer.
(c) If the two countries specialize and trade with each other, which country
will import cars. Explain why?
(d) If the terms of trade are that one car can be exchanged for one tractor,
explain how Atlantis will benefit from such a trade.

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