Suppose There Are Two Small Island Nations in the South

question 69

Multiple Choice

Suppose there are two small island nations in the South Pacific which both produce only fish and bananas. If the people on Island One devote all their time to fishing, they can catch ten kilograms of fish per day. If they devote all their time to picking bananas they can pick ten kilograms per day. On Island Two the people can catch only eight kilograms of fish from a day's fishing, but they can pick 12 kilograms of bananas. The opportunity cost of one fish for Island One is bananas, and the people on Island One should specialise in _________ .

• A) 0.67; bananas
• B) 1.0; bananas
• C) 1.0; fish
• D) 0.67; fish

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Definitions:

Exchange Rate

The price of one country’s currency expressed in another country’s currency.

Currency Swap

A financial agreement to exchange principal and/or interest payments of a loan in one currency for equivalent amounts in another currency.

Exchange Rate Risk

The potential for investors to experience losses due to changes in currency exchange rates.

Interest Rate Swap

A financial derivative agreement between two parties to exchange one stream of interest payments for another, based on a specified principal amount.