The exhibition will be held in the City Museum, located in the north of the city.

你这样用过去分词作定语不是不可以，但有可能被误读为句子的状语。因为现在分词或过去分词也可以作状语，与句子主语构成逻辑主谓关系。因此，我觉得你们老师的建议有道理，加上which is，就排除了误读的可能性，句子的结构也并没有复杂多少。简练是一个需要考虑的因素，但同时也应尽量避免误解。因为，The exhibition is clocated...这样的理解不能排除。

我同意曾老师的解答。

located in the north of the city 是一个非限制性定语，若改为定语从句，则是一个限制性定语从句。以下两句意思是相同的，但不如第一句简练：

The exhibition will be held in the City Museum, located in the north of the city.

The exhibition will be held in the City Museum, which is located in the north of the city.

曹老师考虑得太多了。不可能出现这种理解：“The exhibition is clocated... 这样的理解不能排除。” located in the north of the city 这个定语，不可能“舍近求远”去修饰the exhibition。