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3. Free trade is beneficial only your country is strong enough to stand up foreign competition.

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2. Land and labor are used to produce two products, a land abundant country increasesthe labor supply, and then this would improve the country’s terms of trade.

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1. Canada is a large trading partner of U.S. This is not reasonable according to the Gravity model.

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10. An increase in government purchases will lead to ( )

A. a rise in its exchange rate and a fall in its output
B. a rise in both its exchange rate and its output
C. a fall in its exchange rate and rise in its output
D. a fall in both its exchange rate and its output

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9. The relative purchasing power parity says that the percentage change in the exchange rate between two currencies over any period equals the difference between ( )

A. the interest rates of two countries
B. the growth rates of two countries
C. the inflation rates of two countries
D. the ratios of trade to GDP of two countries

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