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    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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