a) Show using relative demand and supply curves the impact of (B) foreign aid on the terms of trade of the (A) country assuming countries consume relatively more of the good they export. Use arrows to show any shifts in curves. PE and QE refer to the price and quantity of the exported good of the (A) country and P1 and Q; refer to the price and quantity of the imported good of the (A) country. Label both the old terms of trade (superscripted l) and the new terms of trade (superscripted 2). Assume aid is untied and we consider export and import prices of the donor country in the solution given below PE/PI (PE/P1)l (PE/P1)2 QE/ QI The income that foreign aid provides to the recipient country results in an increase in the relative demand for the good exported by the recipient country (if we assume that consumers purchase relatively more of the good they export). The relative supply curve is unchanged so that the terms of trade of the recipient country increase (and the terms of trade of the donor country fall If the aid were \"tied\" and 100% of the aid had to be spent on the donor country 's exported good the donor country would see an increase in its terms of trade (and lessening the benet of the aid to the recipient country.)